By James J. Terry, Esq. and Kyle Hendrickson, Esq.
Zetlin & De Chiara LLP
On September 8, 2009, the Governor of New York signed into law new legislation amending the Construction Contracts Act (the “Act”). The amendments to the Act (the “Amendments”) expand the number of contracts subject to the Act, convert many of the Act’s default rules into mandatory requirements and provide for expedited arbitration if an owner does not comply. According to the New York State Legislature, these Amendments were needed to “ensure greater enforcement mechanisms are available for employees, contractors and subcontractors.” Additionally, the Amendments were deemed “necessary to ensure that payments required by construction contracts are made in a timely manner.” While they may ensure prompt payment to contractors, they will limit the flexibility of owners in contracting for construction, alteration or maintenance of their property.
The pre-amendent construction contracts act
Prior to the Amendments, the Act contained a set of default rules for construction contracts that required payment to contractors within a prescribed period of time. The Act applied to contracts for the “construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement” except for public buildings or structures, “where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds” $250,000. However, the Act did not apply to individual one-, two- or three-family homes, residential tract developments of 150 or fewer one- or two-family homes, residential projects where the aggregate size of the project was 9,000 s.f. or less, public housing projects of fewer than 150 units or projects related to the reconstruction of the World Trade Center.
If a project was subject to its provisions, the original Act created a set of default rules entitling contractors to submit invoices on a monthly basis, at which time an owner was generally required to approve or disapprove the invoice within 12 business days. If approved, the owner was then required to pay the contractor within 30 days.
Regardless of whether the default rules of the Act applied or the parties had agreed to different terms for payment, aggrieved contractors had certain remedies under the original Act that could not be changed by agreement. First, if payment was delayed beyond the established time period, the contractor was entitled to interest on the unpaid balance at the rate of one percent per month (well above the legal rate of nine percent per year statutorily applicable to most contracts in New York). Second, if an owner failed to approve or pay undisputed invoices, the contractor was entitled to suspend performance after providing the owner with written notice and an opportunity to cure.
2009 amendments to the construction contracts act
Although the Amendments do not fundamentally alter the rules for payment set forth in the original Act, they convert many default rules into mandatory requirements, expand the reach of the Act and provide for arbitration as a remedy for non-payment.
The Amendments expand the number of projects subject to this statute. First, the cost threshold for contracts for construction, alteration or maintenance of structures to which the Act will apply is reduced from $250,000 to $150,000. Second, the threshold number of one- or two-family dwellings in a residential tract development is reduced from 150 to 100. Third, the size threshold for residential construction projects is reduced from 9,000 s.f. to 4,500 s.f. or less. Fourth, the threshold number of residential units receiving financial assistance from the government is reduced from 150 to 75 units.
The Amendments also convert the default rules regarding payment into mandatory requirements and provide that any contractual provision establishing payment terms which differ from those established in the Act are “void and unenforceable.” Accordingly, all contracts to which the Act applies must now provide for payments on the terms set forth in the Act.
Generally, the Amendments only prohibit contractual provisions that depart from the Act’s payment provisions. Thus, although owners may not negotiate for an extension of time in which to pay contractors after approval of an invoice, owners may negotiate for an extension of the time to approve or disapprove an invoice.
The Amendments also create an additional remedy for contractors for non-payment beyond the interest payment and work suspension remedies contained in the original Act. The Amendments provide for expedited arbitration and describe the procedures to be followed. Specifically, upon service of written notice that a violation of the Act has occurred, the parties are to attempt to resolve the matter between themselves. If unable to do so, 15 days following delivery of the written notice, “the aggrieved party may refer the matter…to the American Arbitration Association for an expedited arbitration.” As with the payment provisions, the Act expressly provides that any contractual provision making this expedited arbitration unavailable to any party is “void and unenforceable.”
Conclusion
In short, the Amendments to the Act have significantly limited the latitude of owners entering into certain construction contracts to negotiate the terms of payment to contractors. While latitude still exists to negotiate for additional time to approve payment applications, owners must be cognizant of the limitations imposed by the Act or they will be caught off guard by the potentially powerful remedy newly granted to contractors to compel compliance through an expedited arbitration procedure.
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