the new york prompt ay s t act: an underutilized t … pay act book.pdf · this program has been...

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This program has been approved by the Board of Continuing Legal Education of the Supreme Court of New Jersey for 3 hours of total CLE credit. Of these, 0 qualify as hours of credit for Ethics/Professionalism, and 0 qualify as hours of credittoward certification in civil trial law, criminal trial law, workers compensation law and/or matrimonial law.

The New York PromPT PaY acT: aN UNderUTilized Tool for GeTTiNG YoUr

clieNT PaidPrepared in connection with a Continuing Legal Education course presented

at New York County Lawyers’ Association, 14 Vesey Street, New York, NY presented on Monday, September 9, 2013.

P r o g r A m C o - s P o N s o r s :

NYCLA’s Construction Law and Arbitration & ADR Committees

P r o g r A m F A C u L t Y :

Neal Eiseman, Goetz Fitzpatrick LLPHenry L. Goldberg, Goldberg & Connolly

Michael Marra, American Arbitration AssociationRobert MacPherson, Gibbons P.C.

m o d E r A t o r :

Joel Sciascia, Pavarini McGovern LLC

3 TRANSITIONAL & NON-TRANSITIONAL MCLE CREDITS: This course has been approved in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3 Transitional & Non-Transitional credit hours: 3 PP

Information Regarding CLE Credits and Certification

The New York Prompt Pay Act: An Underutilized Tool for Getting Your Client

Paid September 9, 2013; 6:00 PM to 9:00 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your

course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at

the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time

you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

The New York Prompt Pay Act: An Underutilized Tool for Getting Your Clients Paid

Monday, September 9, 2013; 6:00 PM to 9:00 PM

Moderator: Joel Sciascia, Pavarini McGovern LLC Faculty: Neal Eiseman, Goetz Fitzpatrick LLC Henry Goldberg, Goldberg & Connolly Michael Marra, American Arbitration Association Robert McPherson, Gibbons PC

AGENDA

5:30 PM – 6:00 PM Registration 6:00 PM – 6:10 PM Introductions and Opening Remarks 6:10 PM – 9:00 PM Discussion

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NEW YORK CONSOLIDATED LAW SERVICECopyright © 2013 Matthew Bender, Inc.a member of the LexisNexis (TM) Group

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*** This section is current through 2013 released chapters 1-173, 176, 177, 179-181, 183-186, 188, 190, 192-194,198-202, 204-207, 213, 224, 227, 234, 237, 239-247, 250-255, 257-259, 261-264, 266, 268-277, 279, 280-283,

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GENERAL BUSINESS LAWARTICLE 35-E. CONSTRUCTION CONTRACTS

Go to the New York Code Archive Directory

NY CLS Gen Bus Article 35-E Note (2013)

Gen Bus Article 35-E Note

HISTORY:Add, L 2002, ch 127, § 2, eff Jan 14, 2003 (see 2002 note below).

NOTES:

Editor's Notes

Laws 2002, ch 127, §§ 1 and 3, eff Jan 14, 2003, provides as follows:Section 1. Legislative intent. The legislature finds that firms and organizations that provide construction services in

this state expect and deserve to be paid in a prompt and timely manner. By and large providers and receivers of suchservices contract freely and, in good faith, meet their obligations in a timely and just manner. It is the intent of thislegislation to address those situations in which, contrary to existing contracts, payments for approved services areunjustly delayed. Unjustified delays in paying construction contractors and material suppliers may discourage suchfirms and organizations from doing business in this state. Consequently, it is the intent of this legislation to set defaultstandards for the payment of bills on construction contracts and in those situations where payments are not made withintime periods established in such contracts, authorize remedies including reasonable interest payments and circumstancesfor stop work provisions. Consistent with accepted business practices and with sound principles of construction andfiscal management, it is the intent of this legislation to encourage parties to construction contracts to make payments atleast as expeditiously as existing contracts require and further reduce existing payment processing time whereverfeasible, while at the same time permitting such entities to contract freely, perform proper and reasonable managementand financial oversight activities designed to ensure that construction services are provided in a safe, efficient andfiscally prudent manner.

Page 1

§ 3. This act shall take effect on the one hundred eightieth day after it shall have become a law and shall apply toconstruction contracts entered into on or after such date unless the construction contract is entered into as part of aconstruction project for which a permit or permits have been issued and work has begun on such projects prior to theeffective date of this act.

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NY CLS Gen Bus § 756 (2013)

§ 756. Definitions

As used in this article:

1. "Construction contract" means a written or oral agreement for the construction, reconstruction, alteration,maintenance, moving or demolition of any building, structure or improvement, or relating to the excavation of or otherdevelopment or improvement to land, and where the aggregate cost of the construction project including all labor,services, materials and equipment to be furnished, equals or exceeds [fig 1] one hundred fifty thousand dollars. For thepurposes of this article a construction contract shall not include any such contract made and awarded by the state, anypublic department, any public benefit corporation, any public corporation or official thereof, or a municipal corporationor official thereof for construction, reconstruction, alteration, repair, maintenance, moving or demolition of any publicworks project nor any contract with a contractor or subcontractor which is part of such project; or any such contract thepurpose of which is the construction, reconstruction, alteration, repair, maintenance, moving or demolition of anindividual one, two or three family residential dwelling or a residential tract development of one hundred [fig 2] or lessone or two family dwellings, or any residential construction project where the aggregate size of such project is [fig 3]four thousand five hundred square feet or less, or any residential project of fewer than [fig 4] seventy-five units whichreceives financial assistance from the federal government, the state or a municipal entity designed for householdsearning an average of one hundred twenty-five percent of the housing and urban development agency area medianincome.

2. "Contractor" means any person, firm, partnership, corporation, association, company, organization or other

Page 2NY CLS Gen Bus Article 35-E Note

entity, including a construction manager, or any combination thereof, which enters into a construction contract with anowner.

3. "Owner" means any person, firm, partnership, corporation, company, association or other organization or otherentity, or a combination of any thereof, (with an ownership interest, whether the interest or estate is in fee, as vendeeunder a contract to purchase, as lessee or another interest or estate less than fee) that causes a building, structure orimprovement, new or existing, to be constructed, altered, repaired, maintained, moved or demolished or that causes landto be excavated or otherwise developed or improved.

4. "Subcontractor" means any person, firm, partnership, corporation, company, association, organization or otherentity, or any combination thereof, which is a party to a contract with a contractor or another subcontractor to perform aportion of work pursuant to a construction contract.

5. "Material supplier" means any person, firm, partnership, corporation, company, association, or other organizationor entity, or any combination thereof, which is party to a contract with an owner, contractor or subcontractor, for theprovision of construction materials and/or equipment necessary to the completion of a construction contract.

6. "Notice." Any notice by the owner, contractor or subcontractor under this article shall be sent by facsimile andreputable overnight courier and shall be deemed effective on the date sent.

HISTORY:Add, L 2002, ch 127, § 2, eff Jan 14, 2003 (see 2002 note below).Sub 1, amd, L 2009, ch 417, § 2, eff Sept 8, 2009 (see 2009 note below).The 2009 act deleted at fig 1 "two hundred fifty thousand dollars" at fig 2 "fifty", at fig 3 "nine thousand" and at fig 4

"one hundred fifty"

NOTES:

Editor's Notes




Page 3NY CLS Gen Bus § 756

Laws 2009, ch 417, § 6, eff Sept 8, 2009, provides as follows:§ 6. This act shall take effect immediately and shall apply to construction contracts entered into after such date, except

those contracts entered into as part of a construction project for which a permit or permits have been issued and workhas begun on such projects prior to the effective date of this act.

LexisNexis 50 State Surveys, Legislation & Regulations

Real Estate Improvement Contracts

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NY CLS Gen Bus § 756-a (2013)

§ 756-a. Obligations

It is the policy and purpose of this article to expedite payment of all monies owed to those who perform contractingservices pursuant to construction contracts. Except as otherwise provided in this article, the terms and conditions of aconstruction contract shall supersede the provisions of this article and govern the conduct of the parties thereto.

1. Billing cycle. The parties to a construction contract may, by mutual agreement, establish a billing cycle for thesubmission of invoices requesting payment for work performed pursuant to a construction contract. In the absence of anagreement by the parties as to the billing cycle, the billing cycle shall be the calendar month within which the work isperformed.

2. Invoices.(a) A contractor shall be entitled to invoice the owner for interim payments at the end of the billing cycle. A


contractor shall be entitled to submit a final invoice for payment in full upon the performance of all the contractor'sobligation under the contract.

(i) Upon delivery of an invoice and all contractually required documentation, an owner shall approve ordisapprove all or a portion of such invoice within twelve business days. Owner approval of invoices shall not beunreasonably withheld nor shall an owner, in bad faith disapprove all or a portion of an invoice. If an owner declines toapprove an invoice or a portion thereof, it must prepare and issue a written statement describing those items in theinvoice that are not approved. An owner may decline to approve an invoice or portion of an invoice for:

(1) Unsatisfactory or disputed job progress;(2) Defective construction work or material not remedied;(3) Disputed work materials;(4) Failure to comply with other material provisions of the construction contract;(5) Failure of the contractor to make timely payments for labor including collectively bargained fringe benefit

contributions, payroll taxes and insurance, equipment and materials, damage to the owner, or reasonable evidence thatthe construction contract cannot be completed for the unpaid balance of the construction contract sum; or

(6) Failure of the owner's architect to certify payment for any or all of the reasons set forth in this section so longas the reasons are included in the owner's written statement of disapproval.

(ii) Upon delivery of an invoice and all contractually required documentation, a contractor or subcontractor shallapprove or disapprove all or a portion of such invoice within twelve business days. Contractor and subcontractorapproval of invoices shall not be unreasonably withheld nor shall a contractor or subcontractor, in bad faith, disapproveall or a portion of an invoice. Nothing in this section shall prohibit the contractor or subcontractor, at the time ofapplication to the owner or contractor, from withholding such application to the owner or contractor for payment to thesubcontractor or material supplier for:

(1) Unsatisfactory or disputed job progress;(2) Defective construction work or material not remedied;(3) Disputed work;(4) Failure to comply with other material provisions of the construction contract; or(5) Failure of the subcontractor to make timely payments for labor including collectively bargained fringe

benefit contributions; payroll taxes and insurance, equipment and materials, damage to contractor or anothersubcontractor or material supplier, or reasonable evidence that the subcontract cannot be completed for the unpaidbalance of the subcontract sum.

(b) Nothing in this subdivision shall authorize the withholding of an application to the owner or contractor for thepayment to a subcontractor or material supplier when due to a delay in job progress by the owner, contractor or anothersubcontractor or material supplier other than the applicant or applicant's subcontractor or material supplier.

3. Payment.(a) The owner's payment of a contractor's interim and final invoices shall be made on the basis of a duly approved

invoice of work performed and the material supplied during the billing cycle.(i) Unless the provisions of this article provide otherwise, the owner shall pay the contractor strictly in accordance

with the terms of the construction contract.(ii) [fig 1] Payment of an interim or final invoice shall be due from the owner not later than thirty days after

approval of the invoice.(iii) If payment by the owner is contingent upon lender approval, payment of a contractor's interim or final invoice

or the amount of loan proceeds disbursed by the lender for payment of the contractor's interim or final invoice shall bedue from the owner seven days after receipt by the owner of good funds except where the provisions of section sevenhundred fifty-six-d of this article applies.

(iv) An owner may withhold from an interim payment only an amount that is sufficient to pay the costs andexpenses the owner reasonably expects to incur in order to cure the defect or correct any items set forth in writingpursuant to subparagraph (i) of paragraph (a) of subdivision two of this section, or in the alternative, to withhold anamount not to exceed the line item amount appearing in the agreed schedule of values together with any change orders,additions and/or deletions, if such schedule has been previously submitted, and/or an amount sufficient to cover

Page 5NY CLS Gen Bus § 756-a

liquidated damages as established in an agreed upon schedule in the construction contract.(b) The contractor or subcontractor's payment of subcontractor or material supplier's interim or final invoice shall be

made on the basis of a duly approved invoice of the work performed and materials supplied during the billing cycle.(i) Unless the provisions of this article provide otherwise, the contractor or subcontractor shall pay the

subcontractor strictly in accordance with the terms of the construction contract. Performance by a subcontractor inaccordance with the provisions of its contract shall entitle it to payment from the party with which it contracts.Notwithstanding this article, where a contractor enters into a construction contract with a subcontractor as agent for adisclosed owner, the payment obligation shall flow directly from the disclosed owner as principal to the subcontractorand through the agent.

(ii) When a subcontractor has performed in accordance with the provisions of its construction contract, thecontractor shall pay to the subcontractor, and each subcontractor shall in turn pay to its subcontractors, the full orproportionate amount of funds received from the owner for each subcontractor's work and materials based on work orservices provided under the construction contract, seven days after receipt of good funds for each interim or finalpayment, provided all contractually required documentation and waivers are received.

(iii) A contractor or subcontractor may withhold amounts received from an owner in connection with an interimpayment due to a subcontractor or material supplier only such sums that are sufficient to pay the direct expenses as arereasonable to correct deficiencies identified pursuant to subparagraph (ii) of paragraph (a) of subdivision two of thissection, or in the alternative, to withhold an amount not to exceed the line item amount appearing in the agreed scheduleof values, together with any change order, additions or deletions, if such schedule has been previously submitted [fig 1].

(iv) If a contractor, after submitting an invoice to an owner under a construction contract, but before making apayment to a subcontractor or material supplier for the subcontractor's or material supplier's performance covered bysuch invoice, discovers that all or a portion of the payment otherwise due to the subcontractor or material supplier issubject to withholding from the subcontractor or material supplier in accordance with the construction contract and theconditions set forth in subparagraph (ii) of paragraph (a) of subdivision two of this section, then the contractor shall:

(1) As soon as practicable upon ascertaining the cause giving rise to a withholding, but prior to the due date for asubcontractor or material supplier payment, furnish to the subcontractor or material supplier and the owner writtennotice of withholding specifying conditions for withholding payment and identifying the amount to be withheld;

(2) Reduce the subcontractor's or material supplier's interim payment by an amount not to exceed the amountspecified in the notice of withholding; and

(3) Pay the subcontractor or material supplier amounts withheld within seven days after correction of theidentified subcontractor or material supplier performance deficiency and receipt of all required documentation andwaivers, unless the funds [fig 1] therefor must be obtained from the owner's next interim payment due to a reduction inthe contractor's billing directly resulting from the subcontractor's or material supplier's performance deficiencyidentified in the notice of withholding.

(c) A written notice of any withholding under this subdivision shall be issued to a subcontractor or material supplierspecifying:

(i) The amount to be withheld;(ii) The specific causes for withholding under the terms of the construction contract and pursuant to this

subdivision;(iii) The remedial actions necessary to be taken by the subcontractor or material supplier in order to receive

payments of the amounts withheld; and(iv) The documentation and waivers required.

4. Notice. A contractor or subcontractor shall disclose to a subcontractor, at the time the construction subcontract isentered into, the due date for receipt of payments to the contractor or subcontractor from the owner or the contractor asthe case may be. If a contractor or subcontractor fails to accurately disclose the due date to a subcontractor, thecontractor or subcontractor shall be obligated to pay the subcontractor as though the due dates established in paragraph(a) of subdivision three of this section were met by the owner. In addition, upon written request of a subcontractor, theowner shall provide notice to such subcontractor within five days of making any interim or final payment to the


contractor. The subcontractor's request shall remain in effect for the duration of the subcontractor's work on the project.

HISTORY:Add, L 2002, ch 127, § 2, eff Jan 14, 2003 (see 2002 note below); amd, L 2009, ch 417, § 3, eff Sept 8, 2009 (see

2009 note below).Opening par, amd, L 2009, ch 417, § 3, eff Sept 8, 2009 (see 2009 note below).Sub 3, par (a), subpar (ii), amd, L 2009, ch 417, § 3, eff Sept 8, 2009 (see 2009 note below).The 2009 act deleted at fig 1 "Unless otherwise agreed to by the parties, payment"Sub 3, par (b), subpar (iii), amd, L 2009, ch 417, § 3, eff Sept 8, 2009 (see 2009 note below).The 2009 act deleted at fig 1 ", and/or an amount sufficient to cover liquidated damages as established in an agreed

upon schedule in the construction contract"Sub 3, par (b), subpar (iv), cl (3), amd, L 2009, ch 417, § 3, eff Sept 8, 2009 (see 2009 note below).The 2009 act deleted at fig 1 "therefore"

NOTES:

Editor's Notes









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NY CLS Gen Bus § 756-b (2013)

§ 756-b. Remedies

1. (a) If any interim or final payment to a contractor is delayed beyond the due date established in paragraph (a) ofsubdivision three of section seven hundred fifty-six-a of this article, the owner shall pay the contractor interestbeginning on the next day at the rate of one percent per month or fraction of a month on the unpaid balance, or at ahigher rate consistent with the construction contract.

(b) Notwithstanding any contrary agreement, if any interim or final payment to a subcontractor is delayed beyondthe due date established in paragraph (b) of subdivision three of section seven hundred fifty-six-a of this article thecontractor or subcontractor shall pay its subcontractor interest, beginning on the next day, at the rate of one percent amonth or fraction of a month on the unpaid balance, or at a higher rate consistent with the construction contract.

2. (a) (i) If an owner fails to approve or disapprove an invoice within the time limits established in subparagraph (i) ofparagraph (a) of subdivision two of section seven hundred fifty-six-a of this article, or to pay the contractor theundisputed invoice amount within the time limits provided by paragraph (a) of subdivision three of section sevenhundred fifty-six-a of this article, the contractor may suspend contractually required performance, only after providingthe owner written notice and an opportunity to cure consistent with subparagraph (ii) of this paragraph.

(ii) A contractor intending to suspend performance on the construction contract for failure of the owner to maketimely payments or approvals within the time limits provided by this article must provide the owner written notice atleast ten calendar days before the contractor's intended suspension. Such notice shall:

(A) inform the owner that payment for undisputed invoice amounts have not been received; and(B) state the intent of the contractor to suspend performance for non-payment.

If after the tenth calendar day following written notice the owner has not cured the deficiency, the contractor maysuspend performance.

(iii) A contractor shall not be deemed in breach of the construction contract for suspending performance pursuant to

Page 8NY CLS Gen Bus § 756-b

this section.

(b) (i) A subcontractor may suspend contractually required performance if any or all of the occurrences outlined inclauses (A), (B) and (C) of this subparagraph occur and only after providing written notice and an opportunity to cureconsistent with subparagraph (ii) of this paragraph:

(A) If an owner fails to make timely payments for undisputed invoices within the time limits established bysubdivision three of section seven hundred fifty-six-a of this article for the subcontractor's work and the contractor alsofails to pay the subcontractor for the approved work;

(B) If an owner pays the contractor within the time limits established by subdivision three of section sevenhundred fifty-six-a of this article for undisputed invoices for work performed by the subcontractor but the contractorfails to make payment to the subcontractor within the time frames established by this article for the subcontractor'swork;

(C) If an owner fails to approve or disapprove a portion of contractor's invoice for work performed by thesubcontractor within the time limits established in paragraph (a) of subdivision two of section seven hundred fifty-six-aof this article;

(D) If a contractor or subcontractor fails to approve or disapprove a subcontractor's invoice within the time limitsestablished in paragraph (b) of subdivision three of section seven hundred fifty-six-a of this article; or

(E) If an owner fails to approve portions of the contractors' billing for work performed by the subcontractor withinthe time limits established by this article and the reasons for such failure are not the fault of or directly related to thesubcontractor's work.

(ii) A subcontractor intending to suspend performance for failure to receive timely payments within the time limitsestablished pursuant to this article must provide both the owner and the contractor written notice at least ten calendardays before the subcontractor's intended suspension. Such notice shall:

(A) inform the owner and the contractor that payment for undisputed billing amounts have not been received; and(B) state the intent of the contractor to suspend performance for non-payment.

If after the tenth calendar day following written notice either the owner or the contractor has not cured thedeficiency, the subcontractor may suspend performance and/or attempt to resolve in compliance with subdivision threeof this section.

(iii) A subcontractor shall not be deemed in breach of the construction contract for suspending performance pursuantto this section.

(iv) (A) A contractor or subcontractor that suspends performance as provided in this section shall not be required tofurnish further labor, materials or services until the contractor or subcontractor is paid the undisputed invoice amount atthe time period for completion as provided in the construction contract, or a final determination has been made incompliance with subdivision three of this section and complied with. All of the time frames established within [fig 1]this section shall be extended for the length of time performance was suspended. Payment of documented actual costsincurred for re-mobilization resulting from suspension shall be negotiated between the parties.

(B) In the event of suspension of a construction contract, as provided in this article, all materials, equipment, tools,construction equipment and machinery located at the job site shall remain the sole and exclusive property of thecontractor or subcontractor and shall be removed from the job site, if necessary, within a reasonable period of time.Access to the contractor's or subcontractor's property shall not be unreasonably withheld.

3. (a) Upon receipt of written notice of a complaint (i) that an owner has violated the provisions of this article; (ii) that acontractor has violated the provisions of this article; (iii) where a contractor alleges a subcontractor has violated theprovisions of this article; (iv) where a subcontractor alleges a contractor has violated the provisions of this article; (v)where a subcontractor alleges that another subcontractor has violated the provisions of this article; (vi) where acontractor or subcontractor alleges a material supplier has violated the provisions of this article; or (vii) where amaterial supplier alleges a contractor or subcontractor has violated the provisions of this article; the parties shall attemptto resolve the matter giving rise to such complaint.

(b) The written notice required under this section shall be delivered at or sent by any means that provides written,


third-party verification of delivery to the last business address known to the party giving notice.

(c) If efforts to resolve such matter to the satisfaction of all parties are unsuccessful, the aggrieved party may referthe matter, not less than fifteen days of the receipt of third party verification of delivery of the complaint, to theAmerican Arbitration Association for an expedited arbitration pursuant to the Rules of the American ArbitrationAssociation.

(d) Upon conclusion of the arbitration proceedings, the arbitrator shall submit to the parties his or her opinion andaward regarding the alleged violation.

(e) The award of the arbitrator shall be final and may only be vacated or modified as provided in articleseventy-five of the civil practice law and rules upon an application made within the time provided by sectionseventy-five hundred two of the civil practice law and rules.

HISTORY:Add, L 2002, ch 127, § 2, eff Jan 14, 2003 (see 2002 note below); amd, L 2009, ch 417, § 4, eff Sept 8, 2009 (see

2009 note below).Sub 2, par (b), subpar (ii), cl (B), closing par, amd, L 2009, ch 417, § 4, eff Sept 8, 2009 (see 2009 note below).Sub 2, par (b), subpar (iv), cl (A), amd, L 2009, ch 417, § 4, eff Sept 8, 2009 (see 2009 note below).The 2009 act deleted at fig 1 "the construction contract of a contractor or subcontractor"Sub 3, add, L 2009, ch 417, § 4, eff Sept 8, 2009 (see 2009 note below).

NOTES:

Editor's Notes









Case Notes:

Because the work on a nursing home was completed two years before the effective date of N.Y. Gen. Bus. Law §756-b, a subcontractor was not entitled to recover interest pursuant to the statute. Oakwood Realty Corp. v HRH Constr.Corp. (2008, 2d Dept) 51 App Div 3d 747, 858 NYS2d 677.

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NY CLS Gen Bus § 756-c (2013)

§ 756-c. Retention

By mutual agreement of the relevant parties an owner may retain a reasonable amount of the contract sum asretainage. A contractor or subcontractor may also retain a reasonable amount for retainage so long as the amount doesnot exceed the actual percentage retained by the owner. Retainage shall be released by the owner to the contractor nolater than thirty days after the final approval of the work under a construction contract. In the event that an owner failsto release retainage as required by this article, or the contractor or subcontractor fails to release a proportionate amountof retainage to the relevant parties after receipt of retainage from the owner, the owner, contractor, or subcontractor, as


the case may be, shall be subject to the payment of interest at the rate of one percent per month on the date retention wasdue and owing.


NOTES:

Editor's Notes






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NY CLS Gen Bus § 756-d (2013)

§ 756-d. Exceptions for failure of lender to disburse funds

The date of payment required by the owner, the contractor and/or subcontractor pursuant to section seven hundredfifty-six-a of this article, shall be extended to the seventh day after the owner, contractor or subcontractor, as the casemay be, receives loan proceeds necessary to make such payment in the event that:

1. the owner, contractor or subcontractor, as the case may be, has obtained a loan intended to pay for all or part ofthe construction contract;

2. the owner, contractor or subcontractor, as the case may be, has timely requested disbursement of proceeds fromthat loan; and

3. the lender is legally obligated to disburse such proceeds to the owner, contractor or subcontractor, as the casemay be, but has failed to do so in a timely manner.


NOTES:

Editor's Notes



§ 3. This act shall take effect on the one hundred eightieth day after it shall have become a law and shall apply to

Page 13NY CLS Gen Bus § 756-d

construction contracts entered into on or after such date unless the construction contract is entered into as part of aconstruction project for which a permit or permits have been issued and work has begun on such projects prior to theeffective date of this act.



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NY CLS Gen Bus § 756-e (2013)

§ 756-e. Exceptions for lower Manhattan reconstruction

The provisions of this article shall not apply to any construction contracts for the reconstruction, alteration, moving ordemolition of any building, structure or improvement, or relating to the excavation of or any development orimprovement to land in and around the world trade center necessitated by the September eleventh, two thousand oneterrorist attack on such center.


NOTES:

Editor's Notes

Laws 2002, ch 127, §§ 1 and 3, eff Jan 14, 2003, provides as follows:

Page 14NY CLS Gen Bus § 756-d

Section 1. Legislative intent. The legislature finds that firms and organizations that provide construction services inthis state expect and deserve to be paid in a prompt and timely manner. By and large providers and receivers of suchservices contract freely and, in good faith, meet their obligations in a timely and just manner. It is the intent of thislegislation to address those situations in which, contrary to existing contracts, payments for approved services areunjustly delayed. Unjustified delays in paying construction contractors and material suppliers may discourage suchfirms and organizations from doing business in this state. Consequently, it is the intent of this legislation to set defaultstandards for the payment of bills on construction contracts and in those situations where payments are not made withintime periods established in such contracts, authorize remedies including reasonable interest payments and circumstancesfor stop work provisions. Consistent with accepted business practices and with sound principles of construction andfiscal management, it is the intent of this legislation to encourage parties to construction contracts to make payments atleast as expeditiously as existing contracts require and further reduce existing payment processing time whereverfeasible, while at the same time permitting such entities to contract freely, perform proper and reasonable managementand financial oversight activities designed to ensure that construction services are provided in a safe, efficient andfiscally prudent manner.




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§ 757. Void provisions

Page 15NY CLS Gen Bus § 756-e

The following provisions of construction contracts shall be void and unenforceable:

1. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract, with theexception of a contract with a material supplier, that makes the contract subject to the laws of another state or thatrequires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted inanother state.

2. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that aparty to the contract cannot suspend performance under the contract if another party to the contract fails to make promptpayments under the contract.

3. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating thatexpedited arbitration as expressly provided for and in the manner established by section seven hundred fifty-six-b ofthis article is unavailable to one or both parties.

4. A provision, covenant, clause or understanding in collateral to or affecting a construction contract establishingpayment provisions which differ from those established in subdivision three of section seven hundred fifty-six-a andsection seven hundred fifty-six-b as applicable.

HISTORY:Add, L 2002, ch 127, § 2, eff Jan 14, 2003 (see 2002 note below).Sub 3, add, L 2009, ch 417, § 5, eff Sept 8, 2009 (see 2009 note below).Sub 4, add, L 2009, ch 417, § 5, eff Sept 8, 2009 (see 2009 note below).

NOTES:

Editor's Notes









9 of 9 DOCUMENTS


All rights reserved


285-287, 290, 291, 293, 295, 296, 298-301, 303, 305-308 ***




§ 758. Severability

If any clause, sentence, paragraph, subdivision or part of this article, or the application thereof to any person orcircumstance, shall be adjudged by any court of competent jurisdiction to be invalid or unconstitutional, such judgmentshall not affect, impair or invalidate the remainder thereof, but shall be confined in its operation to the clause, sentence,paragraph, subdivision or part of this article, or in its application to the person or circumstance, directly involved in thecontroversy in which such judgment shall have been rendered.


NOTES:

Editor's Notes


FILED: NEW YORK COUNTY CLERK 07/26/2013 INDEX NO. 651927/2013

NYSCEF DOC. NO. 37 RECEIVED NYSCEF: 07/26/2013

c;; -z 0

wen 0<( _w 1-0:: en(!) ::Jz ..,_ o3: 1-Q c...J w...J o::O o::LL ww LLJ: WI-O::o:: >o ...JLL. ...J ;::) LL. 1-0 w a. en w 0:: en w en <( 0 -z 0 i= 0 :z

SUPREME COURT OF THE STATE OF NEW YORK- NEW YORK COUNTY

PRESENT: 0. PETER SHERWOOD PART 49 Justice

SOUTHGATE OWNERS CORP., INDEX NO. 651927/2013

Petitioner,

MOTION DATE

-against-MOTION SEQ. NO. 001

KNS BUILDING RESTORATION INC., MOTION CAL. NO.

Respondent.

The following papers, numbered 1 to ___ were read on this motion to stay arbitration.

PAPERS NUMBERED

Notice of Motion/ Order to Show Cause -Affidavits - Exhibits ...

Answering Affidavits-Exhibits-------------

Replying Affidavits-------------------

Cross-Motion: Yes No

Upon the foregoing papers, it is ordered that this motion to stay arbitration is decided

in accordance with the accompanying decision and order.

Dated: July 24, 2013 ~- -~\ / --...z (__./ ~// -~

0. PETERS!JERWOOD, J.s.?

Check one: [~L DISPOSITION . NON-FINAL DISPOSITION

Check if appropriate: I DO NOT POST l : REFERENCE

SUBMIT ORDER/ JUDG. ] SETTLE ORDER/ JUDG.

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: PART 49

------------------------------------------------------------------------)( SOUTHGATE OWNERS CORP.,

Petitioner,

-against-

KNS BUILDING RESTORATION INC.,

Respondent.

-----------------------------------------------------------------------)( 0. PETER SHERWOOD, J.S.C.:

DECISION AND ORDER Motion Seq. 001

Index No.: 651927/2013

Petitioner, Southgate Owners Corp. ("Southgate), which is a housing cooperative that

hired respondent, KNS Restoration, Inc. ("KNS"), to make repairs to the premises, seeks to

stay arbitration of KNS's claim for payment of $78,802.00. KNS asserts that the claim is for

an undisputed amount of monies owed for services rendered pursuant to the terms of a

construction contract between Southgate and KNS. Thus the claim is arbitiable under the New

York Prompt Payment Act, General Business Law§ 756-b(3)(c) (the "PPA") even though the

Standard Form American Institute of Architects Agreement("AIA Contract") the parties

signed was modified to delete the arbitration clause.

KNS asserts that pursuant to the provisions of GBL §756-b, the claim is subject to

mandatory arbitration. Southgate maintains that the parties agreed expressly not to arbitrate

and that the PP A does not entitle KNS to arbitration of the dispute because the PPA concerns

payment of undisputed amounts and the amount demanded in this case is a disputed amount

due to multiple defaults by KNS. Southgate states that KNS defaulted on the contract by, inter

alia (1) failing to provide adequate labor, equipment and materials to complete the work

within the time provided for in the contract; (2) misrepresenting its use of subcontractors; (3)

failing to obtain prior approval of subcontractors; (4) failing to make payments to

subcontractors consistent with the Lien Law and the PP A; (5) failing to provide supervision

consistent with contract requirements; and (6) failing to provide documents, including (a)

copies of subcontractor agreements, (b) proof of subcontractor's insurance, (c) warranties, (d)

lien waivers from all subcontractors and suppliers, and (e) project closeout documents.

Southgate adds that during the course of the contract it was required to issue five (5) separate

notices of contract breach as well as a Final Notice, none of which have been cured.

KNS argues that the issue of arbitrability should be referred to the arbitrator. The

court disagrees. Although questions concerning matters such as whether a party's claims fall

within the scope of the parties arbitration agreement, whether conditions precedent to

arbitration have been waived or whether an arbitration demand was timely filed are for the

arbitrator to decided, (see, e.g.[Matter of Diamond Waterproofing Systems, Inc. v 55 Liberty

Owners Corp., 4 NY3d 247,252 [2005]; 2P1 CenturyNorthAmer. Ins. Co. v Douglas, 105 AD3d

463 [1'1 Dept 2013]), the threshold issue of whether the parties have agreed to arbitrate or

otherwise are bound to arbitrate, is a matter for the courts to decide (see CPLR 7503[a];

Nationwide General Ins. Co. v Investors Ins. Co., 37 NY2d 91, 95[1975]; Cheng v Oxford Health

Plans, Inc., 15 AD3d 207, 208 [1'1 Dept 2005]).

The PP A is intended to encourage the prompt payment of undisputed amounts owed

to construction contractors and subcontractors. GBL §756-a states that its "purpose ... is to

expedite payment of all monies owed to those who perform contracting services pursuant to

construction contracts". The law is not intended to trump the terms of agreements of parties

to construction contracts. The law provides that "[e]xcept as otherwise provided in this article,

the terms and conditions of a construction contract shall supercede the provisions of this

article and govern the conduct ofthe parties.". The law requires that invoices be approved or

disapproved in a timely fashion and defines the permissible grounds for disapproval (see GBL

§756-a[2] [a] [i]).

In this case, KNS submitted payment applications numbers 5 and 6 on November 29,

2012 and December 27, 2012 respectively. Southgate issued timely responses on December 6,

2012 and January 15,2013 respectively, declining to approve specific items of work. Southgate

states that it paid $155,961 of the contract price and that KNS had asserted an outstanding

balance of$125,800. Apparently, KNS has adjusted its payment request and now seeks only

$78,802. Southgate continues to dispute this amount.

GBL §756-b sets forth a timetable for payment of undisputed invoice amounts and

requires payment of interest at the rate of one percent per month for late payment (see GBL

Page 2 of 3

§756-b[i]). It also establishes a timetable and procedure for contractors to give notice and to

suspend performance for non-payment of undisputed amount without fear of being held in

breach of contact (see GBL §756-b(2]).

Pursuant to GBL §756-b(3), an aggrieved party may give written notice of a complaint

"that the owner has violated the provisions ofthis article" and requires that "the parties shall

attempt to resolve the matter giving rise to such complaint". If negotiations fail, "the

aggrieved party may refer the matter ... for an expedited arbitration". GBL §756-b(3)(c).

These provisions do not purport to require parties to construction contracts to forego

the traditional right of contracting parties to choose whether to litigate disputed claims or to

submit disputed claims to arbitration. The PP A applies to undisputed invoices only. The

terms and conditions of the modified AlA Contract continue to govern disputed invoices (see

GBL §576-a). The contract of the parties in this case expressly excludes arbitration as the

vehicle for resolution of disputed matters. Accordingly, the petition must be granted. It is

ORDERED and ADJUDGED that the petition to stay arbitration of the disputed

invoices at issue in this case is GRANTED; and it is further

ORDERED and ADJUDGED that the demand for arbitration, American Arbitration

Association claim number 002-MWX-GDC, is hereby permanently STAYED.

DATED: July 24, 2013 ENTER, _ .

&·~~ 0. TER SHERWOOD

J.S.C.

Page 3 of 3

8/1/13 New York Law Journal: Southgate Owners Corp v KNS Building Restoration 651927 2013

www.newyorklawjournal.com/CaseDecisionFriendlyNY.jsp?id=1202613014594# 1/3

ALM Properties, Inc.Page printed from: New York Law Journal

Back to Decision

Southgate Owners Corp. v. KNS BuildingRestoration, 651927/2013

Supreme Court, New York County, Part 49

651927/2013

New York Law Journal

2013-07-31 09:04:47.0

Cite as: Southgate Owners Corp. v. KNS Building Restoration, 651927/2013, NYLJ 1202613014594, at*1 (Sup., NY, Decided July 24, 2013)

651927/2013

Justice O. Peter Sherwood

Decided: July 24, 2013

DECISION AND ORDER

*1

Petitioner, Southgate Owners Corp. ("Southgate), which is a housing cooperative that hired respondent,KNS Restoration, Inc. ("KNS"), to make repairs to the premises, seeks to stay arbitration of KNS's claimfor payment of $78,802.00. KNS asserts that the claim is for an undisputed amount of monies owed forservices rendered pursuant to the terms of a construction contract between Southgate and KNS. Thusthe claim is arbitiable under the New York Prompt Payment Act, General Business Law §756-b(3)(c) (the"PPA") even though the Standard Form American Institute of Architects Agreement("AIA Contract") theparties signed was modified to delete the arbitration clause.

KNS asserts that pursuant to the provisions of GBL §756-b, the claim is subject to mandatory arbitration.Southgate maintains that the parties agreed expressly not to arbitrate and that the PPA does not entitleKNS to arbitration of the dispute because the PPA concerns payment of undisputed amounts and the

http://www.newyorklawjournal.com/index.jsp

http://www.newyorklawjournal.com/CaseDecisionNY.jsp?id=1202613014594



amount demanded in this case is a disputed amount due to multiple defaults by KNS. Southgate statesthat KNS defaulted on the contract by, inter alia (1) failing to provide adequate labor, equipment andmaterials to complete the work within the time provided for in the contract; (2) misrepresenting its use ofsubcontractors; (3) failing to obtain prior approval of subcontractors; (4) failing to make payments tosubcontractors consistent with the Lien Law and the PPA; (5) failing to provide supervision consistentwith contract requirements; and (6) failing to provide documents, including (a) copies of subcontractoragreements, (b) proof of subcontractor's insurance, (c) warranties, (d) lien waivers from allsubcontractors and suppliers, and (e) project closeout documents.

*2

Southgate adds that during the course of the contract it was required to issue five (5) separate notices ofcontract breach as well as a Final Notice, none of which have been cured.

KNS argues that the issue of arbitrability should be referred to the arbitrator. The court disagrees.Although questions concerning matters such as whether a party's claims fall within the scope of theparties arbitration agreement, whether conditions precedent to arbitration have been waived or whetheran arbitration demand was timely filed are for the arbitrator to decided, (see, e.g. [Matter of DiamondWaterproofing Systems, Inc. v. 55 Liberty Owners Corp., 4 NY3d 247, 252 [2005]; 21st Century NorthAmer. Ins. Co. v. Douglas, 105 AD3d 463 [1st Dept 2013]), the threshold issue of whether the partieshave agreed to arbitrate or otherwise are bound to arbitrate, is a matter for the courts to decide (seeCPLR 7503[a]; Nationwide General Ins. Co. v. Investors Ins. Co., 37 NY2d 91, 95 [1975]; Cheng v. OxfordHealth Plans, Inc., 15 AD3d 207, 208 [1st Dept 2005]).

The PPA is intended to encourage the prompt payment of undisputed amounts owed to constructioncontractors and subcontractors. GBL §756-a states that its "purpose…is to expedite payment of allmonies owed to those who perform contracting services pursuant to construction contracts". The law isnot intended to trump the terms of agreements of parties to construction contracts. The law provides that

"[e]xcept as otherwise provided in this article, the terms and conditions of a construction contract shallsupercede the provisions of this article and govern the conduct of the parties.". The law requires thatinvoices be approved or disapproved in a timely fashion and defines the permissible grounds fordisapproval (see GBL §756-a[2][a][i]).

In this case, KNS submitted payment applications numbers 5 and 6 on November 29, 2012 andDecember 27, 2012 respectively. Southgate issued timely responses on December 6, 2012 and January15, 2013 respectively, declining to approve specific items of work. Southgate states that it paid $155,961of the contract price and that KNS had asserted an outstanding balance of $125,800. Apparently, KNShas adjusted its payment request and now seeks only $78,802. Southgate continues to dispute thisamount.

GBL §756-b sets forth a timetable for payment of undisputed invoice amounts and requires payment ofinterest at the rate of one percent per month for late payment (see GBL

*3

§756-b[i]). It also establishes a timetable and procedure for contractors to give notice and to suspendperformance for non-payment of undisputed amount without fear of being held in breach of contact (seeGBL §756-b[2]).



Pursuant to GBL §756-b(3), an aggrieved party may give written notice of a complaint "that the owner hasviolated the provisions of this article" and requires that "the parties shall attempt to resolve the mattergiving rise to such complaint". If negotiations fail, "the aggrieved party may refer the matter…for anexpedited arbitration". GBL §756-b(3)(c).

These provisions do not purport to require parties to construction contracts to forego the traditional rightof contracting parties to choose whether to litigate disputed claims or to submit disputed claims toarbitration. The PPA applies to undisputed invoices only. The terms and conditions of the modified AIAContract continue to govern disputed invoices (see GBL §576-a). The contract of the parties in this caseexpressly excludes arbitration as the vehicle for resolution of disputed matters. Accordingly, the petitionmust be granted. It is

ORDERED and ADJUDGED that the petition to stay arbitration of the disputed invoices at issue in thiscase is GRANTED; and it is further

ORDERED and ADJUDGED that the demand for arbitration, American Arbitration Association claimnumber 002-MWX-GDC, is hereby permanently STAYED.

DATED: July 24, 2013

ENTER

Touro Law Review

Volume 28 | Number 1 Article 12

7-18-2012

The Privatization of Civil Justice: An Exposition onNew York's Prompt Payment Law and ItsImposition of Mandatory ArbitrationJames M. Tsimis

Follow this and additional works at: http://digitalcommons.tourolaw.edu/lawreviewPart of the Dispute Resolution and Arbitration Commons

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Recommended CitationTsimis, James M. (2012) "The Privatization of Civil Justice: An Exposition on New York's Prompt Payment Law and Its Imposition ofMandatory Arbitration," Touro Law Review: Vol. 28: No. 1, Article 12.Available at: http://digitalcommons.tourolaw.edu/lawreview/vol28/iss1/12

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mailto:[email protected]

323

THE PRIVATIZATION OF CIVIL JUSTICE: AN EXPOSITION

ON NEW YORK’S PROMPT PAYMENT LAW AND ITS

IMPOSITION OF MANDATORY ARBITRATION

James M. Tsimis*

I. INTRODUCTION

In a world of constant flux and fluctuation, one rule generally

remained invariable: arbitration required the mutual assent of both

parties. It seems, however, that all good and simple things come to

an end. In 2009, the New York State legislature amended the Prompt

Payment Law with the objective of establishing a default rule that

prescribes the manner with which providers of construction services

are compensated for the work and services they provide.1 The legis-

lature observed that, generally, those who receive construction ser-

vices and the providers that render them “contract freely and, in good

faith, meet their obligations in a timely and just manner.”2 Neverthe-

less, the crux of the legislation addresses the concern of undue delay

* J.D. Candidate, 2012, Touro College, Jacob D. Fuchsberg Law Center. 2009, Stony

Brook University, B.A. in Anthropology. I wish to thank my supportive family and friends

for a lifetime of unwavering encouragement and understanding in all my endeavors, but es-

pecially so over the last two years. Additionally, I would like to thank Michael Mulqueen

who was the impetus and inspiration for this Comment and whose support was steadfast dur-

ing my summer under his tutelage. Finally, I must thank Timothy Riselvato, as well as the

rest of the talented Touro Law Review staff, who were integral to this Comment‟s publica-

tion. 1 Editor‟s Notes to N.Y. GEN. BUS. LAW § 756 (CONSOL. 2010) (describing legislative in-

tent). 2 Id. Most sophisticated construction contracts are, at a minimum, fundamentally derived

from form contracts as provided for by the American Institute for Architects, and most—if

not all—include arbitration provisions. Gerald Lebovits & Lucero Ramirez Hidalgo, Alter-

native Dispute Resolution in Real Estate Matters: The New York Experience, 11 CARDOZO J.

CONFLICT RESOL. 437, 451 n.41 (2010). Where a contract exists that dictates the terms be-

tween the parties, the default rules of the Prompt Payment Law need not apply. Editor‟s

Notes to GEN. BUS. § 756.

1

Tsimis: The Privatization of Civil Justice

Produced by The Berkeley Electronic Press, 2012

324 TOURO LAW REVIEW Vol. 28

of payments for approved services in the construction industry.3

Moreover, the law provides for the authorization of “remedies includ-

ing reasonable interest payments and circumstances for stop work

provisions.”4 The legislature explained that:

it is the intent of this legislation to encourage parties to

construction contracts to make payments at least as

expeditiously as existing contracts require and further

reduce existing payment processing time wherever

feasible, while at the same time permitting such enti-

ties to contract freely, perform proper and reasonable

management and financial oversight activities de-

signed to ensure that construction services are pro-

vided in a safe, efficient and fiscally prudent manner.5

Thus, for private construction projects worth over $150,000,6

this law is designed to assuage the anxieties of those engaging in, and

soliciting the business of, construction providers. This law is an

attempt to promote a market with safeguards and regulation. This

law assures that compensation is justly dispersed. Yet this law, the

author argues, is unconstitutional.

While the Prompt Payment Law is not wholly egregious, its

flagrancy nevertheless stems from section 756-b.7 The statute pro-

vides that any violation of the prompt payment conditions may be

settled by “binding arbitration at the request of the „aggrieved par-

ty. ‟ ” 8 The statute provides as follows: First, violations must be

brought to the written attention of the party who is alleged to have

violated the statute by the other “aggrieved” party who claims the vi-

olation.9 After receipt of that notice, the parties should attempt to re-

3 Id. Timely payments create a more productive and efficient work environment and can

drastically reduce both external and internal transactional costs. Id. 4 Id. Stop work provisions allow the contractor or subcontractor to do as the name sug-

gests—stop work—but more importantly, it gives the construction provider leverage against

the party with whom disagreement or conflict exists because stopping work will inevitably

incur additional expenses on behalf of the defaulting party. 5 Id. (describing legislative intent). 6 Editor‟s Notes to N.Y. GEN. BUS. LAW § 756. The previous version of the Prompt Pay-

ment Law called for the price of the project to be $250,000 or greater so as to trigger the sta-

tute. N.Y. GEN. BUS. LAW § 756 (2002), amended by N.Y. GEN. BUS. LAW § 756 (2009). 7 N.Y. GEN. BUS. LAW § 756-b. 8 Neal M. Eiseman & Robert J. MacPherson, Mandatory Arbitration in Construction

Payment Disputes, 243 N.Y. L.J. 4, 4 (2010). 9 N.Y. GEN. BUS. LAW § 756-b(3)(a).

2

Touro Law Review, Vol. 28 [2012], No. 1, Art. 12

http://digitalcommons.tourolaw.edu/lawreview/vol28/iss1/12

2012 THE PRIVATIZATION OF CIVIL JUSTICE 325

solve the matter on their own volition.10 In the event that no resolu-

tion can be agreed upon, the “aggrieved” party then has fifteen days

from the time the other party receives the written notice to initiate “an

expedited arbitration pursuant to the Rules of the American Arbitra-

tion Association.”11

Quite obviously, the procedure just described is inherently

problematic. For instance, the party receiving the notice may not

consent to the arbitration—that is, he may not wish to waive his right

to a jury trial should one be afforded to him. Furthermore, any exist-

ing contract between the parties, whether memorialized in written

form or not and absent provisions to the contrary, may implicitly and

impliedly reflect that any disputes arising from or relating to the con-

tract shall be resolved in a court of law.12 Irrespective of those under-

lying contractual connotations, however, the arbitrator, according to

the statute, will then render his or her decision to the parties with re-

spect to the alleged violation, and “the award of the arbitrator shall be

final,”13 leaving the only effective means of vacating the arbitrator‟s

final decision by way of C.P.L.R. Section 7501.14 Thus, this provi-

sion of the Prompt Payment Law provides for the aggrieved party‟s

redress at the expense of the other party‟s constitutional rights.

Adding teeth to this provision, section 757 states that any

proviso “affecting a construction contract [which states] that expe-

dited arbitration as expressly provided for and in the manner estab-

lished by section seven hundred fifty-six-b of this article is unavaila-

10 Id. at § 756-b(3)(a)(vii) (“Upon receipt of written notice of a complaint . . . the parties

shall attempt to resolve the matter giving rise to such complaint.”). 11 N.Y. GEN. BUS. LAW § 756-b(3)(c). 12 See Eiseman & MacPherson, supra note 8 (describing the way in which a party com-

pelled to arbitrate may not have contemplated it at all). 13 N.Y. GEN. BUS. LAW § 756-b(3)(e). 14 See id.; N.Y. C.P.L.R. § 7501 (CONSOL. 2010). Section 7501 states:

A written agreement to submit any controversy thereafter arising

or any existing controversy to arbitration is enforceable without

regard to the justiciable character of the controversy and confers

jurisdiction on the courts of the state to enforce it and to enter

judgment on an award. In determining any matter arising under

this article, the court shall not consider whether the claim with re-

spect to which arbitration is sought is tenable, or otherwise pass

upon the merits of the dispute.

N.Y. C.P.L.R. § 7501. A looming question, therefore, is what if the parties never agreed to

arbitrate?

3




ble to one or both parties” is void and unenforceable.15 As a result,

any party attempting to circumvent the statute‟s imposition of arbitra-

tion is frustrated by section 757.

Forcing parties to mandatory, binding arbitration runs counter

to parties‟ rights to a jury trial and due process as provided for in both

the Federal and New York Constitutions.16 Therein lies the irony,

however: the Prompt Payment Law is clearly a statute that is de-

signed to reduce the burden of the courts by encouraging arbitra-

tion—yet its intrinsic egregiousness may well thrust the parties into

the very courts it was designed to prevent them from entering. A

contractor or owner will very likely contest the validity of the law‟s

draconian imposition of arbitration.

For these reasons, this article will expose the Prompt Payment

Law‟s brazen constitutional transgressions. Section II will offer a

backdrop of the three alternative dispute resolution mechanisms that

are most prevalent, and will discuss that which differentiates them.

Section III exposes how companies utilize arbitration to their advan-

tage, and how it is sometimes an abuse of constitutional rights. Sec-

tion IV endeavors to chronicle the Supreme Court‟s preference for

arbitration, its influence on New York, and how arbitration is adverse

to the Seventh Amendment and New York‟s analog, as well as the

due process implications of both Federal and New York‟s Constitu-

tions. Finally, Section V concludes this Article with a proposition for

how arbitration should be interpreted and where it fits in the twenty-

first century.

II. THE TOOLS OF THE TRADE THAT COMPRISE ALTERNATIVE

DISPUTE RESOLUTION

Negotiation

Arbitration is but one tool in a vast toolbox of alternative dis-

pute resolution devices available to resolve conflicts between con-

tracting parties. Negotiation and mediation are two other popular

dispute resolution techniques that are effective, but do not have the

same consequence as does arbitration, namely because they are non-

15 N.Y. GEN. BUS. LAW § 757(3) (CONSOL. 2010). 16 See Eiseman & MacPherson, supra note 8 (foreseeing a string of litigation due to the

constitutional implications of the Prompt Payment Law).

4




binding.17 Negotiation, for instance, can be rather informal because it

occurs between the parties with no outside help.18 Moreover, negoti-

ations need not take place only when a problem arises; often, terms

are bargained for through some form of negotiation before a contract

is even executed.19 The relationship between parties can consist of a

constant ebb and flow of negotiations, and it does not matter whether

or not a contract has already been signed. The reality is that most

transactions revolve around some form of negotiation, and in the con-

text of dispute resolution, it is a simple yet effective tool that may re-

sult in an expeditious solution.20

Mediation

Slightly more formal is the dispute resolution tool of media-

tion, which, by its nature, requires not only the parties at the table,

but also a neutral third person facilitating a civil and objective resolu-

tion.21 Hence, mediation is frequently called “facilitated negotia-

tion.”22 Often, courts will require some form of mediation prior to

filing with the court, which, in such a context, provides a valuation

for what a case is worth.23

In order for mediation to be successful, the parties must truly

intend to make amends.24 A mediator‟s role is to encourage open

communication between the disputing parties so as to come to a mu-

tual resolution.25 Rather than impressing upon the parties a half-

hearted resolution, the mediator‟s goal is to inspire a creative solution

17 Lebovits & Hidalgo, supra note 2, at 439-41 (discussing the pros and cons of negotia-

tion, mediation and arbitration). The authors further note that, with regard to negotiation,

“[t]he parties in dispute attempt to reach an agreement using their negotiating skills and leve-

rage.” Id. at 439. 18 Id. 19 Id. 20 Id. (“The advantage of negotiation over other ADR techniques is that parties that nego-

tiate can eliminate the cost associated with a third-party neutral (if any) and overcome adver-

sarial bias.”). 21 Lebovits & Hidalgo, supra note 2, at 440-41. 22 Id. at 440; see also Leonard L. Riskin, Understanding Mediators’ Orientations, Strate-

gies, and Techniques, 1 HARV. NEGOT. L. REV. 7, 13 (1996). 23 Lebovits & Hidalgo, supra note 2, at 440. 24 Id. at 441 (stating that the parties must have a “genuine intention to reach an agreement

[otherwise] mediation will fail. Mediation is not advisable when . . . one side is unreasona-

ble, when one side has a decidedly superior legal position, or when the parties are so antago-

nistic that concessions between them are not viable.”). 25 Id. at 440.

5




that is satisfactory to all the parties involved.26 Any conclusion to the

conflict between the parties as a result of mediation will only be the

product of voluntary, consensual agreement.27 Thus, mediation main-

tains the spirit of willingness associated with negotiation, but is more

structured and formal.

Arbitration

Finally, in the continuum of formality of dispute resolution

tools, arbitration is the most formal and consequential—it is binding

adjudication.28 There are, indeed, compelling benefits associated

with voluntary arbitration. First, the parties must agree that if a dis-

pute were to arise between them during the life of the contract, then

arbitration would be the choice of adjudication to which they would

agree to resolve the conflict. Therefore, when a signed agreement be-

tween parties contains an arbitration clause, it is presumably there

because it was consensually approved by them, and is thus, volunta-

ry. The venue of the arbitration, the neutral arbitrator, and the rules

which shall govern are matters which should be mutually agreed

upon by the parties.29

Secondly, arbitration is private and the decision of the arbitra-

tor is not made public.30 For those who cherish their privacy, arbitra-

tion can be an invaluable alternative. Finally, arbitration is a more

expeditious process than litigation, and as a result, arbitration is, by

and large, faster and cheaper—a benefit that does not require further

explanation.31 Beware, however, because the old adage, “you get

what you pay for,” rings especially true here.

26 Id.; see also James J. Alfini, Mediation as a Calling: Addressing the Disconnect Be-

tween Mediation Ethics and the Practices of Lawyer Mediators, 49 S. TEX. L. REV. 829, 831

(2008) (“[S]elf-determination . . . is the one value that distinguishes mediation from other

dispute resolution processes.”). 27 Lebovits & Hidalgo, supra note 2, at 441. 28 Id. (“The arbitrators‟ ruling or award is ultimately binding on the parties just as it were

rendered by a court as a final judgment.”). 29 Soia Mentschikoff, Commercial Arbitration, 61 COLUM. L. REV. 846, 849 (1961) (call-

ing this type of arrangement “individuated arbitration, [wherein] the making of all arrange-

ments, including the procedures for arbitration, rests entirely with the parties concerned”). 30 Id. In addition to the privacy that arbitration provides, there is also the fact that experts

in the relevant field act as arbitrators in the matter, as well as “the random acceptance by

many businessmen of the idea that arbitration is faster and less expensive than court action.”

Id. 31 Id.

6




In any event, that which most differentiates negotiation and

mediation from arbitration is that the latter‟s effects are binding; that

is, a party may not appeal the arbitrator‟s decision in a court of law.32

Arbitration has its own set of rules, and as such, it need not follow

substantive law.33 Arbitration does not have the power to hold parties

in contempt or award punitive damages.34 An arbitrator can essen-

tially employ his subjective notions of justice, without any rationali-

ty, yet purport to be objective in his outcome. To much dismay, these

truths are what the Supreme Court and the New York Court of Ap-

peals favor.35

Exposing Arbitration: The “Repeat” Theories

Aside from the intuitive problems that are inherent with arbi-

tration, there are two other understated issues that warrant attention.

First is the “repeat provider” theory, which explains that organiza-

tions that repeatedly provide arbitration services for companies that

include arbitration clauses in contracts with consumers and em-

ployees do not have a financial incentive to arbitrate dispassionately,

but rather to settle cases before them in a manner that is most benefi-

cial to the companies that ultimately pay the arbitration fees.36 The

American Arbitration Association and the National Arbitration Fo-

rum are but two arbitration organizations that have agreements with

32 In reality, a party may in fact appeal an arbitrator‟s award, but under only under limited

circumstances as prescribed by C.P.L.R. Article 75. See, e.g., N.Y. C.P.L.R. § 7511

(CONSOL. 2010). 33 See Matthew Savare, Clauses in Conflict: Can an Arbitration Provision Eviscerate a

Choice-of-Law Clause?, 35 SETON HALL L. REV. 597, 598 (2005); see also Lentine v. Funda-

ro, 278 N.E.2d 633, 635 (N.Y. 1972) (“Absent provision to the contrary in the arbitration

agreement, arbitrators are not bound by principles of substantive law or rules of evidence.”). 34 Lawrence N. Gray, Judiciary and Penal Law Contempt in New York: A Critical Analy-

sis, 3 J.L. & POL‟Y 81, 84-86 (1994) (noting that only judges can hold a party in contempt). 35 See generally, Moses H. Cone Mem‟l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 5

(1983) (discussing the finality and binding effect of arbitration decisions); Weinrott v. Carp,

298 N.E.2d 42, 45 (N.Y. 1973) (“ „Once it be ascertained that the parties broadly agree to

arbitrate a dispute arising out of or in connection with the agreement, it is for the arbitrators

to decide what the agreement means and to enforce it according to the rules of law which

they deem appropriate in the circumstances.‟ ” (quoting Matter of Exercycle Corp. (Maratta),

174 N.E.2d 463, 464 (N.Y. 1961))). 36 Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 STAN. L. REV. 1631,

1650 (2005) [hereinafter Sternlight, Creeping Mandatory Arbitration] (“Arbitration organi-

zations . . . are now competing to provide arbitration services for particular companies that

require their consumers to arbitrate future disputes. . . . Obviously, once an entity is named

as the provider, financial benefits accrue to that provider.”).

7




various large companies that name them as the provider of their arbi-

tration services.37 These organizations earn fees, either as a percen-

tage of the amount charged by the arbitrators or, at the very least,

administrative fees.38 However one rationalizes it, the arbitration or-

ganizations and the companies that hire them are very likely to get a

gluttonous slice of some financial pie.

The second trend is known as the “repeat player” bias.39 As

the name suggests, the companies that repeatedly include arbitration

clauses in their contracts are more likely to arbitrate against a multi-

tude of customers or employees.40 The companies thus garner much

more experience and inevitably become more adept at handling the

arbitration proceedings.41 Conversely, consumers and employees are

less likely to arbitrate a matter more than once in their lifetime as op-

posed to a large company, and the “repeat player” theory suggests

that familiarity with the process can either be beneficial or detrimen-

tal to the success of the arbitration, depending on which side of the

table one sits.42

Notwithstanding the benefits of arbitration when it is chosen

voluntarily between parties, the negatives associated with involuntary

mandatory arbitration are too severe to be forced on any party by sta-

tute. The language of the Prompt Payment Law reads that the ag-

grieved party has the option to arbitrate, as evidenced through the use

of the non-mandatory language of “may.”43 Proponents of the statute

may argue that this language mitigates the mandating effect that the

statute imposes on the other party because it is ultimately the ag-

37 Id. 38 Id. (“[P]roviders have a financial incentive to make sure that the company is pleased

with the results in arbitration.”). 39 Id. 40 Id. 41 Sternlight, Creeping Mandatory Arbitration, supra note 36, at 1651. 42 Id. at 1651; see also Lisa B. Bingham, On Repeat Players, Adhesive Contracts, and the

Use of Statistics in Judicial Review of Employment Arbitration Awards, 29 MCGEORGE L.

REV. 223, 239 (1998) (“[T]he perception of fairness is as important as the reality”). 43 N.Y. GEN. BUS. LAW § 756(b)(3)(c) (2010). The relevant portion of the statute is repro-

duced here:

If efforts to resolve such matter to the satisfaction of all parties are un-

successful, the aggrieved party may refer the matter, not less than fifteen

days of the receipt of third party verification of delivery of the com-

plaint, to the American Arbitration Association for an expedited arbitra-

tion pursuant to the Rules of the American Arbitration Association.

Id.

8




grieved party‟s choice. This argument, of course, has no merit. It is

the statute which enables the aggrieved party to force the other to ar-

bitrate in the first place.44 Without this language, the aggrieved party

would not have the statutory option to single-handedly arbitrate, and

might otherwise go to court as previously imagined by the parties.

If the parties do not negotiate a conflict resolution clause in

their contract voluntarily, arbitration should not be intrusively im-

posed on any party by the legislature, and should not be the default

rule under any circumstances. The Prompt Payment Law violates the

right to a jury trial and the right to due process, both of which are

guaranteed by the United States Constitution.45

III. CONSTITUTIONAL PROTECTIONS OPTIONAL

Today‟s backdrop of civil litigation is drastically different

than the backdrop existing when the Constitution was drafted. The

Constitution guarantees that civil litigants have a right to due process

of law46 and the right of trial by jury.47 More modern statutes and

rules assure that the parties in litigation conduct discovery in order to

inform the opposing parties of the other‟s evidence and to limit sur-

prises in court as much as possible.48 A neutral judge or jury then

hears the facts and weighs the evidence, and judgment is rendered

based on the pertinent law.49 If the losing party finds that error was

made, he can appeal to a higher court which can review the law as

applied to the facts, and if substantial error is found, the higher court

can reverse the judgment.50 The process just summarized describes

the judicial system, which affords an even playing field for all parties

44 See id. (stating that the aggrieved party is responsible for referring the matter to the

American Bar Association). 45 U.S. CONST. amend. VII; U.S. CONST. amend. XIV § 1. 46 U.S. CONST. amend. XIV (“[N]or shall any State deprive any person of life, liberty, or

property, without due process of law.”). 47 U.S. CONST. amend. VII.

In Suits at common law, where the value in controversy shall exceed

twenty dollars, the right of trial by jury shall be preserved, and no fact

tried by a jury, shall be otherwise reexamined in any Court of the United

States, than according to the rules of the common law.

Id. 48 FED. R. CIV. P. 26(b). 49 See generally, Right to a Jury Trial, 37 GEO. L.J. ANN. REV. CRIM. PROC. 519 (2008)

(discussing the Sixth Amendment right to a fair and neutral jury). 50 See FED. R. APP. P. 3 (explaining the process for appeal as of right).

9




involved, thereby assuring just outcomes.

Times change, and with time so did the application of those

aforementioned constitutional rights. Many contracts today contain

alternative dispute resolution provisions.51 The “alternative” is a

binding resolution outside of the so-called cumbersome court system,

but it is not always justice. Companies, small and large alike, include

such provisions in their employment contracts because it is often less

expensive to arbitrate than it is to engage in the prolonged and expen-

sive process of filing a lawsuit. Employees who sign these contracts,

however, have little option but to agree to these provisions because

the initial offers are presented to them in a “take it or leave it” fa-

shion. Oftentimes, some form of arbitration is agreed to even though

there may exist a huge disparity of bargaining power between the

parties.52

Proponents of arbitration claim that it is preferred over litiga-

tion because it is less expensive, especially for an employee bringing

suit against a large corporation who might have refused to do so if

faced with the prohibitive expense of hiring an attorney and filing a

lawsuit. Nonetheless, the expense is still high for less affluent em-

ployees that bring arbitration against their employer “big-company”

because arbitrators may charge up to $5,000 per day in certain in-

stances.53 Moreover, attorney‟s fees are not recoverable in arbitra-

tion.54 It is even more expensive when one considers the inferior val-

ue one receives through arbitration as opposed to the value one

receives from litigating in court, where the arbiter is a truly neutral

judge bound by the law of the land.

Ultimately, however, parties under these employment-

contract circumstances agree to them and are bound by them—that is,

51 See Sternlight, Creeping Mandatory Arbitration, supra note 36, at 1639 (“It is difficult

to assess how common mandatory arbitration clauses have become, but they certainly seem

ubiquitous.”). 52 See, e.g., Brennan v. Bally Total Fitness, 198 F. Supp. 2d 377, 382 (S.D.N.Y. 2002)

(“While inequality in bargaining power between employers and employees is not alone suf-

ficient to hold arbitration agreements unenforceable, such inequality, when coupled with

high pressure tactics that coerce an employee's acceptance of onerous terms, may be suffi-

cient to show that an employee lacked a meaningful choice.” (internal citations omitted)). 53 See Christopher R. Drahozal, Arbitration Costs and Contingent Fee Contracts, 59

VAND. L. REV. 729, 738 (2006) (illustrating arbitrators‟ fees from the American Arbitration

Association in Table 1). 54 See Sternlight, Creeping Mandatory Arbitration, supra note 36, at 1641-43 (“Compa-

nies are increasingly using their arbitration clause not only to require arbitration but also to

further limit consumers‟ procedural and even substantive rights.”).

10




a prospective employee has the opportunity to walk away from a con-

tract before signing it, or at least attempt to amend a clause so as to

tip it more in her favor. The employee is ostensibly cognizant of the

possibility of arbitration because of its mention in the contract, and

when such a contract is signed in an employment setting, there is less

sympathy for the employee because she presumably knew the risks

beforehand. Accordingly, employment arbitration agreements are of-

ten upheld in the name of efficiency and in accord with precedent.55

Notwithstanding the Constitution‟s limitations, however,

some state legislatures enacted legislation that not only promote arbi-

tration, but, in fact, mandate it.56 Arbitration essentially embodies the

privatization of the judicial system.57 Such privatization runs counter

to the safeguards that the Constitution provides and is an egregious

violation thereto. As one commentator put it, “[the Constitution]

precludes the state from helping one party require another to give up

her day in court in favor of an arbitration process that is unfair or that

deprives an unwitting party of her right to a jury or a life-tenured

judge.”58 This succinctly encapsulates what the New York State Leg-

islature has done through the Prompt Payment Act.

IV. THE PROMPT PAYMENT LAW AND ARBITRATION IN A

CONSTITUTIONAL CONTEXT

Interpreting the Securities Act of 1933, the Supreme Court

decided Wilko v. Swan,59 where it ruled that arbitration is less protec-

tive than litigation.60 The Court further stated that arbitration requires

55 See Jean R. Sternlight, Rethinking the Constitutionality of the Supreme Court’s Prefe-

rence for Binding Arbitration: A Fresh Assessment of Jury Trial, Separation of Powers, and

Due Process Concerns, 72 TUL. L. REV. 1, 18-19 (1997) [hereinafter Sternlight, Rethinking]

(“Courts have apparently been so impressed by the value of arbitration that they have aban-

doned their purported practice of interpreting a statute according to its plain meaning, in or-

der to favor arbitration over litigation.”). 56 Pennsylvania is the only state thus far that has legislation that compels parties to arbi-

trate regardless of either party‟s willingness to do so. See 55 A.L.R.2d 432 (Originally pub-

lished in 1957). 57 Sternlight, Rethinking, supra note 55, at 6. 58 Id. at 12-13 (noting that courts should honor an arbitration agreement between two

businessmen who voluntarily decide to partake in it, but should otherwise be weary of arbi-

tration agreements wherein one party signs it unwittingly or without the full understanding

that his substantive rights will be abridged). 59 346 U.S. 427 (1953), overruled by Rodriguez de Quijas v. Shearson/Am. Exp., Inc., 490

U.S. 477, 484 (1989). 60 Id. at 436 (indicating that a substantial curbing of constitutional protections comes with

11




subjective findings that must not only be determined, but also applied

“without judicial instruction on the law” and that the arbitrator‟s

award “may be made without explanation of their reasons and with-

out a complete record of their proceedings, [and that] the arbitrators‟

conception of the legal meaning of such statutory requirements as

„burden of proof,‟ „reasonable care‟ or „material fact,‟ . . . cannot be

examined.”61 Since then, the Court has taken a stance in diametric

opposition to its reasoning in Wilko. In the ensuing years, the Court

began to flirt with the idea of enforcing arbitration clauses between

two business entities of equal sophistication.62 Thirty-six years later,

in 1989, the Court finally cemented its slow shift from skepticism of

arbitration to the favorable attitude it harbors toward it today.63

Construction matters offer a particularly salient backdrop for

showcasing the Supreme Court‟s current preference for arbitration.

In 1983, the Court first articulated its broad consent of the use of ar-

bitration over litigation in Moses H. Cone Memorial Hospital v. Mer-

cury Construction Corp.64 There, two parties, a contractor and a hos-

pital, entered into a contract which called for arbitration as the avenue

for which to resolve disputes between them.65 Mercury, the contrac-

tor, attempted to initiate such an arbitration proceeding pursuant to its

allegation that the hospital owed it damages for causing delays in

construction.66 The hospital filed a lawsuit, however, to thwart Mer-

cury‟s attempt from initiating arbitration as delineated in the con-

tract.67 The hospital‟s main contentions were that, “Mercury‟s claim

was without factual or legal basis and that it was barred by the statute

of limitations[,]” and that “Mercury had lost any right to arbitration

under the contract due to waiver, laches, estoppel, and failure to make

a timely demand for arbitration,” and sought as relief “a declaration

arbitration). 61 Id. 62 See, e.g., Scherk v. Alberto-Culver Co., 417 U.S. 506, 520-21 (1974) (ruling that, in a

claim between the two American and German companies, arbitration in this international

commercial context is favorable due to social policy concerns). 63 Rodriguez de Quijas, 490 U.S. at 481 (“ „By agreeing to arbitrate a statutory claim, a

party does not forgo the substantive rights afforded by the statute; it only submits to their

resolution in an arbitral, rather than a judicial, forum.‟ ”) (quoting Mitsubishi Motors Corp.

v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628 (1985)). 64 460 U.S. 1 (1983). 65 Id. at 4-5. 66 Id. at 7. 67 Id.

12




that there was no right to arbitration [and] a stay of arbitration.”68

The Supreme Court ruled that because the growing trend was leaning

toward favoring arbitration,69 laches and estoppel should be inter-

preted narrowly as defenses to arbitration, and that the arbitration

provision would prevail.70

In justifying its obtuse alignment with arbitration over the

constitutionally-provided-for right to litigation, the Court expanded

its 1967 decision in Prima Paint Corp. v. Flood & Conklin Manufac-

turing Corp.,71 where it first determined that fraud in the inducement

was an arbitrable issue according to the United States Arbitration

Act.72 In Moses, the Court expounded on this basis, stating that:

[Since Prima Paint Corp.,] courts of appeals have . . .

consistently concluded that questions of arbitrability

must be addressed with a healthy regard for the federal

policy favoring arbitration. We agree. The Arbitra-

tion Act establishes that, as a matter of federal law,

any doubts concerning the scope of arbitrable issues

should be resolved in favor of arbitration, whether the

problem at hand is the construction of the contract

language itself or an allegation of waiver, delay, or a

like defense to arbitrability.73

The Supreme Court of the United States allowed the lower courts to

effectively dictate its ruling. Commentators have astutely pointed

out, however, that although federal policy “favoring arbitration” more

accurately stands for the proposition that arbitration is a valuable al-

ternative, the Supreme Court here made it unambiguously clear that it

supports the policy of favoring arbitration over litigation.74 Moreo-

68 Id. 69 Moses, 460 U.S. at 24.

The Arbitration Act establishes that, as a matter of federal law, any

doubts concerning the scope of arbitrable issues should be resolved in

favor of arbitration, whether the problem at hand is the construction of

the contract language itself or an allegation of waiver, delay, or a like de-fense to arbitrability.

Id. at 24-25. 70 Id. 71 388 U.S. 395 (1967). 72 Id. at 406 (“Federal courts are bound to apply rules enacted by Congress with respect to

matters-here, a contract involving commerce-over which it has legislative power.”). 73 Moses, 460 U.S. at 24-25 (emphasis added). 74 Sternlight, Rethinking, supra note 55, at 18.

13




ver, the Court stated that any hesitation of whether arbitration is ap-

propriate should nevertheless be tipped in its favor.75 Surely this is

not the voice of reason or justice, nor one that could have been antic-

ipated by the founders of this nation. Even so, the favor of arbitration

remains the prevailing sentiment—one which is supported by not one

scintilla of sound reasoning, but one that is nonetheless perpetuated

by courts‟ reference to Moses.

Once this ruling was handed down and it became clear that

the Supreme Court favored arbitration, companies across the gamut

started to implement arbitration clauses in their employment and con-

sumer contracts.76 Companies have since sought arbitration in order

to escape the niceties of litigation—jury awards, punitive damages,

meaningful discovery, class actions, and of course, publicity.77

Moreover, companies design arbitration clauses that further curb the

procedural and substantive rights of consumers and employees.78 For

instance, some clauses have shortened statutes of limitations, others

require claims to be filed in distant forums, and still others bar partic-

ular forms of relief (e.g., injunctive relief or attorney‟s fees).79

State courts have followed suit, and the New York State legis-

lature, autonomous as it may be in the scheme of federal policy, does

not legislate in a vacuum. It undoubtedly takes into account the poli-

cy considerations of the federal government, as evidenced by the ar-

bitration provision of the prompt payment statute. A legislature does

not make laws it foresees will be overturned; it presumably contem-

plates the laws‟ consequences and enacts them responsibly. Here, the

statutorily mandated arbitration provision is the progeny of the feder-

al government‟s misguided philosophy that arbitration is favorable

over litigation.

The New York legislature passed the Prompt Payment statutes

75 Moses, 460 U.S. at 26 & n.34. Yet, the Court acknowledges that:

[t]he Arbitration Act is something of an anomaly in the field of federal-

court jurisdiction. It creates a body of federal substantive law establish-

ing and regulating the duty to honor an agreement to arbitrate, yet it does

not create any independent federal-question jurisdiction under 28 U.S.C.

§ 1331 (1976 ed., Supp. IV) or otherwise.

Id. at 26 n.32. 76 Sternlight, Creeping Mandatory Arbitration, supra note 36, at 1638 (noting that “busi-

nesses jumped on the opportunity” to force arbitration in contexts that previously might not

have been enforced). 77 Id. 78 Id. at 1641. 79 Id. at 1641-42.

14




with provisions mandating arbitration because the national trend had

been leaning in that direction in recent years.80 This trend is largely

due to the Supreme Court perpetuating a skewed interpretation of the

Federal Arbitration Act (“FAA”). When Congress enacted the FAA

in 1925, the original intention was to allow two parties of equal so-

phistication to engage in arbitration instead of litigation.81 The Court,

however, has since interpreted the FAA to mean that it allows large,

sophisticated companies to take advantage of less powerful parties

who have no choice but to adhere to the former‟s contracts in a “take

it or leave it” fashion.82 Admittedly, the enforcement of agreements

between parties of the same sophistication that bargain for arbitration

as the means by which to resolve their disputes is not problematic.

To imagine, however, that a legislature would enact a statute that

practicably mandates arbitration is an unfortunate legal reality dis-

connected from rationality.

A. The Seventh Amendment and New York’s Analog

State courts have enforced mandatory arbitration agreements

as if the agreements were between two voluntary parties.83 Similarly,

the Prompt Payment Law compels parties into arbitration from

agreements that merely contemplated litigation. This imposition of

arbitration is unconstitutional because it deprives the party of the

right to a hearing by jury under the Seventh Amendment and its New

York analog.84

The Seventh Amendment challenge can only be made if the

case is brought in federal court, under common law, and for damages

of twenty dollars or more.85 To call on a state‟s Seventh Amendment

80 See, e.g., Moses, 460 U.S. at 24 (noting the “liberal federal policy favoring arbitration

agreements”). 81 See Sternlight, Creeping Mandatory Arbitration, supra note 36, at 1636 (“Until quite

recently, . . . arbitration agreements were not used by U.S. businesses to require consumers,

employees, franchisees, or other weaker parties to resolve disputes through private arbitra-

tion rather than in court.”). 82 Id. 83 See id. at 1642 (noting that courts are not persuaded by the fact that arbitration agree-

ments with small print or in a form contract constitute grounds for nullifying them); see also

Harris v. Green Tree Fin. Corp., 183 F.3d 173, 177-78 (3d Cir. 1999) (recognizing the validi-

ty of the contract in question wherein the arbitration clause was in fine print and inconspi-

cuously placed toward the back and bottom of the agreement). 84 U.S. CONST. amend. VII; N.Y. CONST. art. I, § 2. 85 U.S. CONST. amend. VII.

15




analog, the challenger must further ensure that the Federal Arbitration

Act does not preempt the relevant state statute.86

The New York State Constitution provides that “[t]rial by jury

in all cases in which it has heretofore been guaranteed by constitu-

tional provision shall remain inviolate forever; but a jury trial may be

waived by the parties in all civil cases in the manner to be prescribed

by law.”87 The State Constitution further provides that “[t]he legisla-

ture may enact laws, not inconsistent herewith, governing the form,

content, manner and time of presentation of the instrument effectuat-

ing such waiver.”88 Notwithstanding the Constitution‟s permission to

the legislature in delineating statutory waiver requirements, there is

no statute that expressly defines the criteria for which a waiver of

jury trial in civil cases must be obtained.89 New York courts, howev-

er, as well as most other state and federal courts, have prescribed the

manner with which the right to a jury trial in civil cases may be

waived.90 The waiver of a civil jury trial must be clear, unequivocal,

and explicit so as to leave no room for uncertainty regarding the par-

ties‟ intentions.91

The Prompt Payment Law requires that written notice be giv-

en of the complaint the aggrieved party has against the other party,

and that after such notice is given, “the parties shall attempt to re-

solve the matter giving rise to such complaint.”92 The written notice

must be delivered, with third-party verification, to the last business

address known to the party giving notice of the complaint.93 The

question remains whether this effectuates a waiver as defined by the

courts. It is doubtful that a mere letter of complaint by one party to

86 Sternlight, supra note 36, at 1646. 87 N.Y. CONST. art. I, § 2 (emphasis added). 88 Id. 89 N.Y. C.P.L.R. § 4101 (MCKINNEY 2010) lists the actions for which issues of fact shall

be tried by a jury, unless a jury trial is waived. They are: (1) where a party is able to prove a

judgment for a sum of money; (2) for “an action of ejectment; for dower; for waste; for ab-

atement of and damages for a nuisance; to recover a chattel”; (3) any other action provided

for by the New York Constitution. N.Y. C.P.L.R. § 4101(1)-(3). Waiver of jury trial in

criminal cases is governed by N.Y. CRIM. PROC. § 320.10 (McKinney 2010). 90 Jean R. Sternlight, The Rise and Spread of Mandatory Arbitration as a Substitution for

the Jury Trial, 38 U.S.F. L. REV. 17, 25 (1991) [hereinafter Sternlight, Rise and Spread]. 91 Edsaid Realty Corp. v. Samuels, 92 N.Y.S.2d 897, 899 (N.Y. City Ct. 1949) (“While

parties may unquestionably, by agreement, waive the constitutional right of trial by jury in

civil cases, the waiver must be clear and explicit, and must leave no room for doubt as to the

intention of the parties.”) (emphasis added). 92 N.Y. GEN. BUS. LAW § 756(b)(3)(a). 93 Id. § 756 (b)(3)(b).

16




another constitutes waiver of a jury trial for the other party, but the

subsequent provision of the Prompt Payment Law introduces the ar-

bitration provision: “the aggrieved party may refer the matter, not

less than fifteen days of the receipt of third party verification of deli-

very of the complaint, to the American Arbitration Association for an

expedited arbitration pursuant to the Rules of the American Arbitra-

tion Association.”94 The party who was served with the letter is thus

placed in an inferior position because the “aggrieved” party has at its

disposal the statutory mandate to arbitrate. As one commentator put

it, “there is a great difference between a legislature mandating arbi-

tration and a private company doing the same.”95

B. Framework for Arbitration in New York Practice:

Article 75

Article 75 of the Civil Practice Law and Rules (“CPLR”) de-

fines the scope of arbitration between private contracting parties and

allows for judicial oversight over the process.96 Prior to the enact-

ment of Article 75 of the CPLR in 1920, there existed a judicial hos-

tility toward arbitration among the courts.97 Thus, the advent of

CPLR Article 75 ushered in an era of refreshed judicial philosophy,

one that welcomed the new procedural guidelines that made arbitra-

tion more attractive. As a result, the Court of Appeals, mirroring its

federal counterpart,98 now favors arbitration as the best alternative to

the judicial forum for dispute resolution.99 Part of the appeal for arbi-

tration is that it results in expeditious resolutions that are often less

94 Id. § 756 (b)(3)(c). 95 Sternlight, supra note 36, at 1647. 96 See N.Y. C.P.L.R. § 7511 (explaining how a party can vacate or modify an arbitration

award as determined by a judge). 97 See, e.g., Meacham v. Jamestown, F. & C.R. Co., 105 N.E. 653, 654-55 (N.Y. 1914).

[A] distinction [has been] made between the provisions of a contract

providing that before a right of action shall accrue certain facts shall be

determined, or amounts or values ascertained, and an independent cove-

nant or agreement to provide for the adjustment and settlement of all disputes and differences by arbitration to the exclusion of the courts.

Id. at 654. 98 See, e.g., Moses, 460 U.S. at 24. 99 Weinrott v. Carp, 298 N.E.2d 42, 47 (N.Y. 1973) (“The result we suggest in this case is

consistent with the policy adopted by the Federal courts, and is significant since the Federal

arbitration statute is almost identical to, and is derived from, our own arbitration statute.”).

17




expensive and more private.100

Notwithstanding the extreme favorability for arbitration, there

exists a tension between the disadvantages it places on parties—

resulting from the surrendering of significant procedural rights intrin-

sic in arbitration—with any recognized benefits. In Silverman v.

Benmor Coats, Inc.,101 for example, the Court of Appeals is dishear-

tened that,

[A]bsent [a] provision in the arbitration clause itself,

an arbitrator is not bound by principles of substantive

law or by rules of evidence. He may do justice as he

sees it, applying his own sense of law and equity to the

facts as he finds them to be and making an award re-

flecting the spirit rather than the letter of the agree-

ment, even though the award exceeds the remedy re-

quested by the parties. His award will not be vacated

even though the court concludes that his interpretation

of the agreement misconstrues or disregards its plain

meaning or misapplies substantive rules of law, unless

it is violative of a strong public policy, or is totally ir-

rational, or exceeds a specifically enumerated limita-

tion on his power. Nor will an arbitration award be

vacated on “ „the mere possibility‟ ” that it violates an

express limitation on the arbitrator‟s power.102

Through this excerpt of Silverman, it is clear that the New

York Court of Appeals substantially mirrored its apprehension to-

ward arbitration as the Supreme Court did in Wilko 31 years earlier.

Therefore, due to the substantial curbing of procedural rights, courts

still serve a chaperoning function when a party calls for judicial in-

tervention. When a party solicits the involvement of a court, the law

addresses these preliminary threshold issues: whether there actually

was a valid arbitration agreement that contemplated the matters to be

arbitrated;103 whether the applicable statute of limitations has

100 Sablosky v. Edward S. Gordon Co., 535 N.E.2d 643, 646 (N.Y. 1989) (“Although a

party gives up an important right when it agrees to submit a dispute to arbitration, such pro-

ceedings are not less effective in discovering the truth than are judicial proceedings and it is

not, as a matter of public policy, per se unfair to give one party the right to select them.”). 101 461 N.E.2d 1261 (N.Y. 1984). 102 Id. at 1266 (internal citations omitted) (quoting Matter of Tilbury Fabrics v. Stillwater,

Inc., 435 N.E.2d 1093, 1094 (N.Y. 1982)). 103 N.Y. C.P.L.R. § 7503(a) (MCKINNEY 2010) (“Where there is no substantial question

18




lapsed;104 whether the award was procured through “corrupt, fraud or

misconduct”;105 and the impartiality of the arbitrator106 or the arbitra-

tor exceeding his authority.107 This list is illustrative rather than ex-

haustive, as the courts also take into consideration whether the issue

is arbitrable as per prevailing public policy.

Perhaps the principal concern courts must first grapple with

before compelling parties to arbitrate is to determine if, in fact, there

existed such an agreement to arbitrate. A higher degree of scrutiny is

required for arbitration agreements as compared to ordinary con-

tracts.108 The Court of Appeals has stated that:

[t]he reason for this requirement, quite simply, is that

by agreeing to arbitrate a party waives in large part

many of his normal rights under the procedural and

substantive law of the State, and it would be unfair to

infer such a significant waiver on the basis of anything

less than a clear indication of intent.109

Thus, the Court of Appeals would agree that certain sacro-

sanct rights are taken away from parties who arbitrate disputes, and

that opaqueness of terms in an agreement to arbitrate makes it inhe-

rently ineffective. For these reasons, an agreement to arbitrate must

be “express, direct, and unequivocal as to the issues or disputes to be

submitted to arbitration. But, once there is agreement or submission

to arbitration, the scope of the arbitrators is unlimited and, with very

limited exceptions, unreviewable.”110 Consequently, the power

whether a valid agreement was made or complied with . . . .”). 104 N.Y. C.P.L.R. § 7502(b) (MCKINNEY 2010) (“If, at the time that a demand for arbitra-

tion was made or a notice of intention to arbitrate was served, the claim sought to be arbi-

trated would have been barred by limitation of time had it been asserted in a court of the

state, a party may assert the limitation as a bar to the arbitration . . . .”). 105 N.Y. C.P.L.R. § 7511(b)(1)(i) (McKinney 2010). 106 Id. § 7511(b)(1)(ii). 107 Id. § 7511(b)(1)(iii). 108 See, e.g., Marlene Indus. Corp. v. Carnac Textiles, Inc., 380 N.E.2d 239, 242 (N.Y.

1978) (“It has long been the rule in this State that the parties to a commercial transaction

„will not be held to have chosen arbitration as the forum for the resolution of their disputes in

the absence of an express, unequivocal agreement to that effect; absent such an explicit

commitment neither party may be compelled to arbitrate.‟ ” (quoting Matter of Acting Supt.

of Schools of Liverpool Cent. Sch. Dist. (United Liverpool Faculty Assn.), 369 N.E.2d 746,

748 (N.Y. 1977)). 109 Id. 110 Gangel v. N. DeGroot, PVBA, 362 N.E.2d 249, 250 (N.Y. 1977) (citing Weinrott v.

Carp, 298 N.E.2d 42, 46 (N.Y. 1973)).

19




vested with the arbitration process is so potent that it is not something

that should be wielded menacingly by powerful parties, nor used as

leverage to manipulate opponents, as a means of procuring a resolu-

tion through a process which is intrinsically less stringent. Perhaps

more importantly, a legislature should not mandatorily impose arbi-

tration on any party, as the New York legislature does with the

Prompt Payment Law.

In construing arbitration clauses, courts have balanced the le-

gality of the arbitration clause in the context of the entire contract—

that is to say, whether the clause is valid. The issue of validity arises

most often with contracts that contain very broad arbitration clauses.

The leading New York case on the issue is Weinrott v. Carp,111 where

the Court of Appeals held that arbitration clauses are separable from

the contract in its entirety if portions of the contract were found to be

invalid.112 The contention in Weinrott was that because the overall

contract was induced by fraud, so too should the arbitration clause be

struck down as fraudulent.113 The Court, however, provided that:

The CPLR arbitration provisions (CPLR 7501 et seq.)

evidence a legislative intent to encourage arbitration.

Certainly the avoidance of court litigation to save the

time and resources of both the courts and the parties

involved make this a worthwhile goal. One way to

encourage the use of the arbitration forum would be to

prevent parties to such agreements from using the

courts as a vehicle to protract litigation. This conduct

has the effect of frustrating both the initial intent of the

parties as well as legislative policy. In the case at bar,

there were 21 hearings and 2,750 pages of testimony.

111 298 N.E.2d 42 (N.Y. 1973). 112 Id. at 47 (“[W]e now hold that an arbitration provision of a contract is separable, the

agreement to arbitrate would be „valid‟ even if the substantive portions of the contract were

induced by fraud.”). 113 Id. Notice the Court‟s tone when addressing appellant‟s legal contention:

As often happens in this type of case, appellants moved to stay the arbi-

tration on the ground that there was fraud in the inducement of the con-

tract. Although appellants‟ contention was „not supported by the record

and is refuted by documentary evidence‟, the arbitration continued to be

stayed while that preliminary issue laboriously worked its way through

the New York court system. Finally, after the issue fell exhausted at the

Court of Appeals, the arbitration hearings commenced.

Id. (internal citation omitted).

20




If not for the arbitration, that entire burden would have

been placed on our court system. Indeed, had the case

been tried in the formality of the courtroom, it would

have taken longer to dispose of than it did before the

arbitrators. A broad arbitration clause should be given

the full effect of its wording in order to implement the

intention of the parties. Of course, where a form con-

tract is involved or an arbitration provision seems to

be less than broad, a court should give the provision

and the circumstances surrounding its inclusion in the

contract great scrutiny. As a general rule, however,

under a broad arbitration provision the claim of fraud

in the inducement should be determined by arbitra-

tors.114

With that ruling, the Court of Appeals thus aligned New

York‟s arbitration policy with that of the Federal government‟s.115

This ruling effectively means that the validity of the agreement re-

ferred to in CPLR 7503(a) and (b) relates only to the arbitration pro-

vision itself, and not with the contract as a whole, on account of the

arbitration provision‟s severability. Ultimately, this means that an

arbitration provision in an invalid contract will be given effect irres-

pective of the alleged invalidity or illegality of substantive portions of

a contract.116 The Court defends its holding by stating that any con-

trary ruling would defeat the twin aims of arbitration: “speed and fi-

nality.”117

114 Id. at 47-48. 115 Weinrott, 298 N.E.2d at 47 (holding that “[t]he result we suggest in this case is consis-

tent with the policy adopted by the Federal courts.”). 116 Id. at 46.

When the parties to a contract have reposed in arbitrators all questions

concerning the „validity, interpretation or enforcement‟ of their agree-

ment, they have selected their tribunal and no doubt they intend it to de-

termine the contract's „validity‟ should the necessity arise. Judicial in-

tervention, based upon a nonseparability contract theory in arbitration

matters prolongs litigation, and defeats, as this case conclusively demon-strates, two of arbitration's primary virtues, speed and finality.

Id. at 47. 117 Id.

21




C. Article 75 and the Federal Arbitration Act: In

Cahoots?

The preference of the United States Supreme Court, Congress,

the New York Court of Appeals, and the New York legislature for

arbitration over litigation is inherently unconstitutional. Never did

our framers envision the privatization of our justice system, and yet

mandatory arbitration is the most favored mechanism by which to

dispense it, at both the federal and state level.

The concept that the Federal Arbitration Act (“FAA”) is su-

preme and thus preempts certain state laws is not a novel one.118 Yet

the boundaries of FAA preemption are not obvious, and while the

Supreme Court has held that the FAA does not cover the entire field

of arbitration, it does, in fact, preempt state laws that frustrate the

FAA‟s objectives.119 It would therefore seem imprudent for a state

legislature to enact laws contrary to the FAA. Moreover, so long as

the FAA covers the particular arbitration field in question, it does not

matter whether the case is brought in federal or state court.120 The

Court has differentiated between cases where state laws have invali-

dated arbitration clauses on the basis of unconscionability or fraud,121

and state laws that substantively and procedurally invalidate arbitra-

tion contracts.122

The New York Court of Appeals acknowledges this relation-

ship and has held that “[a] further basic principle . . . is the corollary

tenet that, in situations where the FAA is applicable, it preempts State

law on the subject of the enforceability of arbitration clauses.”123 The

FAA is unique in that it does not grant exclusive jurisdictional au-

thority to the federal courts, thus enabling non-diverse claimants to

118 Sternlight, Rise and Spread, supra note 90, at 35. The author points out that while

those who oppose mandatory arbitration argue that it infringes on state constitutional jury

trial rights, supporters of arbitration argue that the FAA nevertheless preempts certain state

constitutional rights. Id. The author argues, however, that, “it would be inappropriate to

hold that the FAA preempts general jury trial waiver provisions.” Id. 119 Id. at 35-36 (citing Volt Info. Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 477-78 (1989)). 120 See, e.g., Perry v. Thomas, 482 U.S. 483, 489-90 (1987) (“ „We see nothing in the

[Federal Arbitration] Act indicating that the broad principle of enforceability is subject to

any additional limitations under state law.‟ ” (quoting Southland Corp. v. Keating, 465 U.S.

1, 11 (1984))). 121 See, e.g., Doctor‟s Assocs. v. Casarotto, 517 U.S. 681, 687 (1996). 122 Sternlight, Rise and Spread, supra note 90, at 36. 123 Fletcher v. Kidder, Peabody & Co., 619 N.E.2d 998, 1001 (N.Y. 1993).

22




rely on the FAA in state court.124

Nevertheless, the broad scope with which the FAA is applied

should be viewed with skepticism and caution. This federal act

should not be construed in a manner so broad that it would preempt

even state constitutional protections, namely the right to a jury trial.

The inherent right to a jury trial and arbitration must be viewed in

harmony and not with the mindset that they have competing interests.

Ultimately, the excessive favor for arbitration should be balanced,

and perhaps curtailed, with the deference that is due to New York‟s

constitutional guarantee to a jury trial.

A prime example comes from Montana in Kloss v. Edward D.

Jones & Co.,125 where the Montana Supreme Court prevented the

preemption of Montana law by the FAA on the basis that a contrac-

tual waiver of basic constitutional guarantees was one which applied

in various contexts, not merely in the construction of arbitration pro-

visions.126 Thus, the Montana law was construed broadly, as a gener-

al provision, and was not preempted by the FAA.127 So too should

New York law be interpreted.

By interpreting the FAA the way the Supreme Court currently

does, it perpetuates a philosophy that is counter to the underlying

constitutional principles that founded this nation: the right to jury tri-

al, due process in courts of law, and neutral, unbiased judges.128

D. Sheer Nature of Statute Creates a State Action

In order to establish “state action” for implicating arbitration

on due process grounds, there must be evidence proffered that a fed-

eral or state government directly aided in a constitutional violation.129

Thus, it is obvious that when a state statute is questioned, like the

Prompt Payment Law is here, there is no need for a scrupulous ex-

amination of the circumstances that give rise to the violation because

124 See Moses, 460 U.S. at 25. 125 54 P.3d 1 (Mont. 2002). 126 Id. at 15-16. 127 Id. at 16 (“The Supreme Court has . . . held . . . that if a state law governs . . . the valid-

ity, revocability and enforceability of contracts in general then generally applicable contract

defenses, such as fraud, duress or unconscionability, may be applied to invalidate arbitration

agreements without contravening Section 2 of the FAA.”). 128 Sternlight, supra note 55, at 10. 129 Id. at 40.

23




the source is readily apparent.130 In the instant controversy, the

Prompt Payment Law expressly permits private parties with contracts

valued at $150,000 or higher to engage in binding arbitration.131 Sta-

tutory compulsion to arbitrate is state action and is a violation of con-

stitutional canons as delineated in the due process clauses of the State

Constitution132 and the Fourteenth Amendment of the Federal Consti-

tution.133

There exists among the Supreme Court jurisprudence a ple-

thora of cases that hold when the conduct of private entities are so

entwined with the actions of public institutions that the private con-

duct may be deemed state action.134 State legislatures that pass laws

impressing arbitration on parties does indeed constitute state action,

and the Prompt Payment Law is a manifestation of a deliberate and

meticulous attempt by the state to deter parties from exercising their

constitutional rights. Congress enacts laws, which is a direct form of

state action, but in the same vein, the Supreme Court espouses its pre-

ference for arbitration over litigation through its jurisprudence, also a

manifestation of state action.135 Therefore, a colorable argument ex-

ists for state action on behalf of the legislature and the judiciary re-

garding the overt favorability of arbitration on both the federal and

state levels.

Sharrock v. Dell Buick-Cadillac, Inc.136 is a telling case where

the New York Court of Appeals held that certain provisions of the

Lien Law failed to comport with “traditional notions of procedural

due process embodied in the State Constitution, as they deprive[d]

130 Id. 131 N.Y. GEN. BUS. LAW § 756(b)(3)(c) (“If efforts to resolve such matter to the satisfac-

tion of all parties are unsuccessful, the aggrieved party may refer the matter . . . to the Amer-

ican Arbitration Association for an expedited arbitration . . . .”). 132 N.Y. CONST. art. I, § 6. 133 U.S. CONST. amend. XIV. 134 See, e.g., Lugar v. Edmondson Oil Co., 457 U.S. 922, 933 (1982) (holding that where a

state statute authorized a private party to commandeer private property with the assistance of

a public official, the private party had a colorable claim against him under the Due Process

Clause of the Fourteenth Amendment); Burton v. Wilmington Parking Auth., 365 U.S. 715,

726 (1961) (holding that a private restaurant was so intimately linked to a public parking fa-

cility that the restaurant's denial of service to African-American patrons was forbidden under

the Constitution). But see Flagg Bros., Inc. v. Brooks, 436 U.S. 149, 166 (1978) (holding

that no state action existed where a private warehouse used self-help to recoup monies owed

it). 135 See, e.g., Moses, 460 U.S. 1, 29 (“[T]he Court acted within its authority in deciding the

legal issues presented in order to facilitate the prompt arbitration that Congress envisaged.”). 136 379 N.E.2d 1169 (N.Y. 1978).

24




the owner of the vehicle of a significant property interest without

providing any opportunity to be heard.”137 Sharrock‟s husband had

taken her Cadillac to the defendant, Dell Buick-Cadillac, Inc., to re-

place the engine for a total of $225.138 There was no mention of the

storage charges that Sharrock would incur should the car not be

picked up immediately.139 Meanwhile, the original engine that was

installed was defective and had to be replaced, but by that time Shar-

rock‟s husband had been hospitalized and he was unable to continue

communicating with the shop with regard to the repair of the car.140

Soon thereafter, plaintiff received a “Notice of Lien and Sale” pur-

suant to the Lien Law.141 After storage fees brought the price of the

repair up to $502, plaintiff was urged to pay the price or sell the ve-

hicle, which prompted the suit.142

The Court of Appeals held that in order to determine whether

the Due Process Clause of the Fourteenth Amendment was violated,

the pivotal issue was whether the State involved itself in what would

have otherwise been private action.143 Private conduct alone does not

qualify as state action, no matter how reprehensible the conduct.144

There must be a sufficient relation and nexus between the conduct

and a public entity so as to call upon the state action doctrine.145 The

Court cautioned, however, that “the mere fact that an activity might

not constitute State action for purposes of the Federal Constitution

does not perforce necessitate that the same conclusion be reached

when that conduct is claimed to be violative of the State Constitu-

tion.”146 Indeed, it found that the garageman‟s conduct did not vi-

olate the Due Process Clause of the Fourteenth Amendment, but it

137 Id. at 1171. 138 Id. 139 Id. 140 Id. 141 Sharrock, 379 N.E.2d at 1171. 142 Id. at 1171-72. 143 Id. at 1172 (“The threshold question in any judicial inquiry into conduct claimed to be

violative of the due process clause of the Fourteenth Amendment is whether the State has in

some fashion involved itself in what, in another setting, would otherwise be deemed private

activity.”). 144 Id. (“Purely private conduct, however egregious or unreasonable, does not rise to the

level of constitutional significance absent a significant nexus between the State and the ac-

tors or the conduct.”). 145 Id. (“[I]t is settled that where the impetus for the allegedly unconstitutional conduct is

private, the State must have „significantly involved itself‟ in order for that action to fall with-

in the ambit of the Fourteenth Amendment.”) (internal citations omitted). 146 Sharrock, 379 N.E.2d at 1173.

25




did in fact offend the due process clause of the New York Constitu-

tion.147

After clarifying the difference between the State Constitu-

tion‟s due process clause with that of the Fourteenth Amendment in

the Federal Constitution, the Court wrote:

State Constitutions in general, and the New York Con-

stitution in particular, have long safeguarded any

threat to individual liberties, irrespective of from what

quarter that peril arose. Thus, as early as 1843, Justice

Bronson, in speaking of the due process clause of our

State Constitution, noted: “The meaning of the section

then seems to be, that no member of the state shall be

disfranchised, or deprived of any of his rights and pri-

vileges, unless the matter be adjudged against him

upon trial and according to the course of the common

law. It must be ascertained judicially that he has for-

feited his privileges, or that some one [sic] else has a

superior title to the property he possesses, before ei-

ther of them can be taken from him.”148

The Court determined that the Constitutional protections afforded by

the New York Constitution were triggered when there was no judicial

oversight of the conduct of the garageman for which the Lien Law

permitted him disposal of Sharrock‟s property without adequate no-

tice to Sharrock.149 The State, the Court held, had so entwined itself

with the private actor, here the garageman, that the Court was com-

pelled to deem the provisions of the Lien Law as unconstitutional.150

147 Id. The Court reasoned that:

[T]he mere fact that an activity might not constitute State action for pur-

poses of the Federal Constitution does not perforce necessitate that the

same conclusion be reached when that conduct is claimed to be violative

of the State Constitution. Indeed, on innumerable occasions this court

has given our State Constitution an independent construction, affording

the rights and liberties of the citizens of this State even more protection than may be secured under the United States Constitution.

Id. 148 Id. at 1174 (quoting Taylor v. Porter & Ford, 4 Hill 140, 146 (1843)). 149 Id. 150 Sharrock, 379 N.E.2d at 1174 (reasoning that state action, as manifested by the Lien

Law, “compels the conclusion that New York has so entwined itself into the debtor-creditor

relationship as to constitute sufficient and meaningful State participation which triggers the

protections afforded by our Constitution”).

26




Thus, so too should the Court of Appeals render section 756-b

of the Prompt Payment Law unconstitutional. Forcing arbitration is a

direct violation of both the Federal and State constitutions because it

deprives the parties of their day in court by obliging one party to

force the other to arbitrate. In addition to the Prompt Payment Law

being a violation of the Due Process Clause of both the Federal and

State Constitutions, the next section will expound upon how the arbi-

tration provision of the statute is unconstitutionally vague with regard

to waiver of the right to jury trial.

What Constitutes Waiver of Jury Trial?

The right to a jury trial is fundamental, both under federal and

state law.151 The Supreme Court established a four-prong test to de-

termine when there is a valid constitutional right in civil matters.152

These factors are derived from Fuentes v. Shevin,153 where the Court

scrutinized the clarity of the waiver of the right to jury trial,154 the so-

phistication of the parties,155 whether the waiver was voluntary,156

and the substantive fairness of the waiver.157 Although New York

has similar considerations regarding the waiver of jury trial in civil

and criminal contexts,158 these factors should be at the forefront of the

discussion with respect to the Prompt Payment Law notice-provision.

The waiver of constitutional rights by the courts is dealt with

in an apathetic manner. The New York Constitution states that a civil

jury trial may be waived by “the manner to be prescribed by law.”159

Yet the legislature has not created a statute expressly discussing the

manner with which one can waive the right to jury trial in civil cases.

The prerequisite for arbitration according to General Business Law

151 See U.S. CONST. amend. VII; N.Y. CONST. art. I, § 2. 152 Sternlight, Rethinking, supra note 55, at 57-58. 153 407 U.S. 67 (1972). 154 Id. at 95-96 (dismissing waiver that was in fine print where party failed to explain why

there could not be a hearing). 155 Id. at 95 (declining waiver where parties had unequal bargaining power). 156 Id. at 95-96 (rejecting waiver for which sale was allegedly conditioned upon). 157 Id. at 95 (highlighting the importance of whether the party received anything in return

for the waiver). 158 People v. Page, 665 N.E.2d 1041, 1044 (N.Y. 1996) (“The history of the constitutional

waiver provision thus establishes that the requirement that the defendant execute a signed,

written waiver was considered critical to securing a knowing, intelligent and voluntary waiv-

er of the right to trial by jury.”). 159 N.Y. CONST. art. I, § 2.

27




section 756-b is for the aggrieved party to notify the other party by a

written notice.160

It is unclear what the receiving party must do with the notice

if it does not wish to arbitrate, or if the party is silent altogether. The

intent of the legislature regarding the written notice required under

section 756-b is unknown. If the written notice is intended to act as a

waiver of jury trial rights, this is simply inadequate because the pro-

vision of the statute merely requires that the written notice contain

the details of the complaint.161 There is no mention of a waiver of

jury trial for the receiving party. Yet the statute continues on to pro-

vide for arbitration at the behest of the aggrieved party, which has the

effect of backing the other party into a corner. Since arbitrators are

given great deference, and absent any blatant misconduct during the

proceeding, there is little a protesting party can do once the arbitra-

tion proceeding has commenced.

The arbitration provision of the statute is an exemplification

of misconduct by the New York State government, thereby qualifying

the statute as state action in violation of the Due Process Clause and

the right to a jury trial guaranteed by the Constitution. Furthermore,

in evaluating arbitration provisions, courts should presume against

waiver when constitutional rights are involved, unless it is explicit

and clear that the party is waiving his right.162 New York courts fol-

low the same presumption.163 It is therefore irrational to assume that

a simple written notification of a complaint by the aggrieved party to

the other is a waiver of the other party‟s constitutional right to a jury

trial. If the contract between the parties is silent as to conflict resolu-

tion, and the aggrieved party sends notice of arbitration in accordance

with the statute, what is the extent to which the party needs to ac-

quiesce? What if the party who is served with the notice does not

consent to arbitrate? There is nothing in the statute that states the ar-

bitration must be consensual—may the matter then proceed to litiga-

tion if it is not? These are but a few uncertainties, the answers for

which the Prompt Payment Law does not provide.

160 N.Y. GEN. BUS. LAW § 756-b(3)(b). 161 See N.Y. GEN. BUS. LAW § 756-b(3)(a)-(c). 162 Fuentes, 407 U.S. at 94-95, 95 n.31. 163 Edsaid Realty Corp., 92 N.Y.S.2d at 899.

28




V. CONCLUSION

Binding arbitration is not without purpose in the twenty-first

century. When parties agree to be bound by alternative dispute reso-

lution mechanisms to resolve disputes, it is indeed a swift means for

reaching a conclusion. Nevertheless, it is of utmost importance that,

in the context the Prompt Payment Law, we do not allow legislatures

to statutorily impose mandatory binding arbitration.

Courts, unlike legislatures, have a natural inclination to “pre-

fer” and “favor” arbitration over litigation because of the caseload it

deflects from their dockets. While that is not a wholly illegitimate

reason, it flirts dangerously close with overlooking many unconstitu-

tional arbitration clauses and statutes simply by virtue of courts fa-

voring them. It is imperative that society put this issue on the fore-

front of legal discourse so that statutorily mandated arbitration does

not pervade other aspects of the law that intimately affect our lives—

lest we forget that arbitration is not consensual when parties are man-

dated by the government to partake in it.

In summation, the Due Process Clause of both the Federal and

New York Constitutions are violated by the Prompt Payment Law, as

well as the parties‟ right to a jury trial, also guaranteed by both con-

stitutions. The Prompt Payment Law represents multiple constitu-

tional violations under the guise and guile of lessening the influx of

cases in the court system, but does so at the expense of parties‟ con-

stitutional rights. The implications of this legislation, and all like it,

are profound: this republican society in which we live, and the capita-

listic tenet by which it is propelled is lessened by such governmental

regulation to the extent that it will not endure long after government

dictates the intimate matters of private parties in contract.

29



8/1/13 Duane Morris LLP - Amendments to New York Prompt Payment Act Broaden Enforcement

www.duanemorris.com/printPreview?url=http://www.duanemorris.com/alerts/amendments_new_york_prompt_payment_act_3578.html 1/3

ALERTS AND UPDATES

Amendments to New York Prompt Payment Act Broaden Enforcement

March 5, 2010

On September 8, 2009, New York Gov. David Paterson signed into law amendments to the state's Prompt PaymentAct (the "Act") intended to create broader enforcement mechanisms for the benefit of contractors,subcontractors, suppliers and laborers. New York's General Business Law was revised to ensure that contractors,subcontractors and suppliers are timely paid for completed work on private construction projects, and the state's

Labor Law was revised to allow complaints to the New York State Commissioner of Labor of nonpayment of wages

arising from violations of the Act. The following are the more noteworthy changes.

The Policy of the Act Is Recited

The purpose of the Act, to ensure that payments required by private construction contracts are made in a timely

manner, is now spelled out in the statute by the addition of the following language:

It is the policy and purpose of this article to expedite payment of all monies owed to those who perform

contracting services pursuant to construction contracts.1

The Reach of the Act Is Expanded

The reach of the Act was broadened to include smaller construction contracts and smaller projects. The definitionof a construction contract was changed to include any contract whose aggregate price equals or exceeds

$150,000. Previously, to invoke the protections of the statute, the price of the contract had to be $250,000 orgreater. Thus, the statute, as amended, lowers the cost threshold price of applicable construction contracts from

$250,000 to $150,000.2 The new amendments also broaden the definition of a construction contract by: (1) loweringthe aggregate size threshold for residential construction projects from 9,000 square feet to 4,500 square feet or

less; (2) lowering the number of applicable residential public housing units from 150 to 75 units; and (3) lowering the

number of applicable residential tract developments from 150 one- or two-family dwellings to 100 such dwellings.3

Timely Payment Rules Are Not Optional

The Act, as amended, no longer permits parties to contractually opt-out of the statute's payment requirements.4

The party to whom an invoice is submitted has 12 days to approve or disapprove all or a portion of the invoice by a

written statement describing the items not approved.5 The statute lists the reasons for which an owner may not

approve an invoice or portion of one,6 and for which a contractor or subcontractor may not approve an invoice or

portion of one.7 The amendments do not preclude parties from contractually changing the time frame for reviewingan invoice or modifying the reasons for endorsing or rejecting an invoice. However, once approved, an invoice must

be paid within the statutory time frames. An owner must tender payment of an invoice, including final payment,

within 30 days of an invoice's approval.8 A contractor or subcontractor must tender payment to its subcontractorof the proportionate amount paid by the owner for the subcontractor's work within 7 days of having received

payment for the work.9 The parties cannot change by contract the 30-day and 7-day payment periods.10

If the owner, contractor or subcontractor fails to timely pay an invoice within the time frame set forth in the

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statute, interest accrues beginning the day after payment is due.11 The new amendments to the Act also prohibit

parties from contractually opting-out of the obligation to pay interest.12

It is important to note that the General Business Law's new section 757 subdivision 4, which identifies provisions ofcontracts which are void and unenforceable, reads:

A provision, covenant, clause or understanding in collateral to or affecting a construction contractestablishing payment provisions which differ from those established in subdivision three of section seven

hundred fifty-six-a and section seven hundred fifty-six-b as applicable.13

An initial reading may raise the question of whether the limiting reference to "subdivision 3" is applicable to section756-b. However, a better reading of the statute may be that it intends to include all of section 756-b.

Liquidated Damages Are No Longer Deductible

A contractor or subcontractor can no longer withhold monies from payments due a subcontractor or supplier to

cover liquidated damages.14 A contract clause that provides otherwise is void and unenforceable.15 Prior to being

amended, the statute provided that a contractor or subcontractor could withhold from an interim payment to asubcontractor or supplier an amount sufficient to cover liquidated damages set forth in the parties' agreement. Theowner's right to withhold from an interim payment an amount sufficient to cover liquidated damages set forth in the

parties' agreement is unaffected.16

Arbitration of Payment Disputes May Be Required by the Aggrieved Party

The amendments allow a contractor, subcontractor or supplier to use arbitration as a permissive remedy fornonpayment. Where an owner, contractor or subcontractor does not make a timely payment, the aggrieved

contractor, subcontractor or supplier can resort to binding arbitration to resolve the payment dispute. Thenonpaying party can be required to participate in binding arbitration under the auspices of the American

Arbitration Association.17 First, the aggrieved party must provide written notice of nonpayment and attempt to

resolve the matter. If a resolution is not reached by the parties within 15 days, the contractor, subcontractor or

supplier has the option of mandating expedited and binding arbitration.18 The parties may not contract to opt out

of the arbitration requirement.19

In short, arbitration is no longer a mutually agreed-upon means to resolve private construction disputes. An owner,

contractor or subcontractor can now be required to enter into binding arbitration, even if its construction

contract does not contain an arbitration provision.

Labor Law Provisions

The amendments also revise section 196-a of the Labor Law to allow employees and labor unions to file complaintswith the Commissioner of Labor regarding failure to pay wages arising from alleged violations of the Act.

Effective Date of Amendments

The amendments became effective on September 8, 2009, and apply to private construction contracts entered intoafter the effective date, excluding contracts for projects for which permits had been issued and work had begun

prior to the effective date.

Conclusion

The Act as amended maintains its stated purpose of expediting payment to those who perform contracting services

pursuant to construction contracts. However, the new amendments also furnish aggrieved parties with themechanisms that had not existed in the statute to ensure timely payment for completed work.

For Further Information

If you have any questions regarding this Alert or would like more information, please contact Jose A. Aquino,Richard P. Dyer, any member of the Construction Group or the attorney in the firm with whom you are regularly in

contact.










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http://www.duanemorris.com/attorneys/richardpdyer.html

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Duane Morris LLP & Affiliates. © 1998-2013 Duane Morris LLP. Duane Morris is registered service mark of Duane Morris LLP.

Notes

1. N.Y. Gen. Bus. Law § 756-a (Consol. 2010).2. § 756(1).

3. Id.4. § 757(4).

5. § 756-a(2)(a)(i) & (ii).

6. § 756-a(2)(a)(i)(1)-(6).7. § 756-a(2)(a)(ii)(1)-(5).

8. § 756-a(3)(a)(ii).9. Id.

10. § 757(4).

11. § 756-b(1)(a) & (b).12. § 757(4).

13. Id. (emphasis added).14. § 756-a(3)(b)(iii).

15. § 757(4).

16. § 756-a(3)(a)(iv).17. § 756-b(3).

18. Id.19. § 757(3).

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor

should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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STAHLG NYS AmendedPrompt Pay Article Dec09.doc - 2/22/2010 (6:12 PM)

NEW YORK’S AMENDED PROMPT PAYMENT ACT

NEW LEGISLATION SHOULD ACTUALLY FACILITATE TIMELY PAYMENT ON PRIVATE CONSTRUCTION PROJECTS

There is a new weapon against late payments from owners and general contractors on private construction projects in New York. A recently enacted statute amends the Labor Law and General Business Law in relation to the payments on private construction projects. The purpose of the law was to “beef up” the existing, less than successful, Prompt Payment Act and to make available greater enforcement procedures for tradesman, materialmen, contractors and subcontractors. New York previously enacted a Prompt Payment Act for construction work on private projects in New York in July 2002, however, that law was the target of much criticism for its lack of any meaningful enforcement mechanisms. Unlike the previous Act, the new Prompt Payment Act actually has “teeth” and may provide a more effective set of weapons against late payments. The following are a few of the more meaningful provisions of the new Prompt Payment Act. Minimum 30 Day Payment Rule The new Act establishes the maximum time period, 30 days, in which an owner may make payment on an interim or final invoice, which cannot be changed by the parties even if they mutually agree otherwise in their contract. Under the previous Act, payments were required to be made within 30 days, but parties were also free to contract as they desired on their payment provisions, which meant that the payment terms of the construction contract superseded the provisions of the Prompt Payment Act, thereby diminishing any effectiveness the old Act may have had. No L/Ds on Interim Payments The new Act also prohibits contractors and subcontractors from withholding “anticipated” liquidated damages from payments due a subcontractor, tradesman or materialman. Such withholding for liquidated damages was permitted under the previous Act in an amount established in the agreed upon schedule in the parties’ contract.


Binding Expedited Arbitration Finally, and perhaps most importantly, the new Prompt Payment Act provides that, where an owner and/or contractor fails to make payment on an invoice within the required time period, the contractor and/or subcontractor may resort to expedited, binding arbitration to resolve the late payment dispute. This is significant. By contrast, under the previous Act, the only remedy for contractors and subcontractors was to hope to eventually collect interest from the owner and/or suspend performance. Now, in addition to collecting interest on late payments and in lieu of suspending performance, a contractor/subcontractor may first provide written notice of a complaint of late payment and attempt to resolve the matter giving rise to the complaint. If such resolution efforts are unsuccessful, the contractor/subcontractor may refer the matter after 15 days to the American Arbitration Association for expedited arbitration. Significantly, as indicated, the award of the arbitrator shall be final and binding on the parties. G&C Commentary: The new Prompt Payment Act is certainly an improvement over the ineffective previous Act and may actually be an effective tool for subcontractors to ensure the timely payment of their invoices. In fact, it has the potential to dramatically change the “balance of power” along the construction payment food chain in the private sector. In particular, the provision allowing for expedited, binding arbitration could substantially limit the time it takes for disputes over payments to be resolved, during which time subcontractors typically go without payment. However, it is important to remember that, even though you may now resort to arbitration for late and/or non-payment of invoices, you must still comply with all the notice and recordkeeping requirements set forth in your contract in order to preserve your rights to make claims and avoid any waiver of claims you may have against the contractor and/or owner. In addition, before resorting to arbitration, it is important that you do your homework and determine the alleged reason as to why you have not been paid. You also need to establish a paper trail evidencing your receivable which can be used to prove your case at the arbitration. You do not want to go into arbitration only to find out the contractor/owner has a legitimate, or even pretextual, reason for not making payment, one that may have been easily remedied or disproved prior to the arbitration. Upcoming STA Breakfast Seminar- Please join us on January 13th for a comprehensive discussion on : GETTING PAID- The Amended NYS Prompt Payment Act and more.. Wednesday January 13, 2010 8am, Crowne Plaza: Goldberg & Connolly will be conducting this hour program which will review all the effective Subcontractor “Getting Paid” Strategies & Tactics. ( registration form is on the next page). Christopher K. Smith, an associate with the firm, assisted with the preparation of the article.


NEW YORK’S AMENDED PROMPT PAYMENT ACT

NEW LEGISLATION SHOULD ACTUALLY FACILITATE TIMELY PAYMENT ON PRIVATE CONSTRUCTION PROJECTS

There is a new weapon against late payments from owners and general contractors on private construction projects in New York. A recently enacted statute amends the Labor Law and General Business Law in relation to the payments on private construction projects. The purpose of the law was to “beef up” the existing, less than successful, Prompt Payment Act and to make available greater enforcement procedures for tradesman, materialmen, contractors and subcontractors. New York previously enacted a Prompt Payment Act for construction work on private projects in New York in July 2002, however, that law was the target of much criticism for its lack of any meaningful enforcement mechanisms. Unlike the previous Act, the new Prompt Payment Act actually has “teeth” and may provide a more effective set of weapons against late payments. The following are a few of the more meaningful provisions of the new Prompt Payment Act. Minimum 30 Day Payment Rule The new Act establishes the maximum time period, 30 days, in which an owner may make payment on an interim or final invoice, which cannot be changed by the parties even if they mutually agree otherwise in their contract. Under the previous Act, payments were required to be made within 30 days, but parties were also free to contract as they desired on their payment provisions, which meant that the payment terms of the construction contract superseded the provisions of the Prompt Payment Act, thereby diminishing any effectiveness the old Act may have had. No L/Ds on Interim Payments The new Act also prohibits contractors and subcontractors from withholding “anticipated” liquidated damages from payments due a subcontractor, tradesman or materialman. Such withholding for liquidated damages was permitted under the previous Act in an amount established in the agreed upon schedule in the parties’ contract.


Binding Expedited Arbitration Finally, and perhaps most importantly, the new Prompt Payment Act provides that, where an owner and/or contractor fails to make payment on an invoice within the required time period, the contractor and/or subcontractor may resort to expedited, binding arbitration to resolve the late payment dispute. This is significant. By contrast, under the previous Act, the only remedy for contractors and subcontractors was to hope to eventually collect interest from the owner and/or suspend performance. Now, in addition to collecting interest on late payments and in lieu of suspending performance, a contractor/subcontractor may first provide written notice of a complaint of late payment and attempt to resolve the matter giving rise to the complaint. If such resolution efforts are unsuccessful, the contractor/subcontractor may refer the matter after 15 days to the American Arbitration Association for expedited arbitration. Significantly, as indicated, the award of the arbitrator shall be final and binding on the parties. G&C Commentary: The new Prompt Payment Act is certainly an improvement over the ineffective previous Act and may actually be an effective tool for subcontractors to ensure the timely payment of their invoices. In fact, it has the potential to dramatically change the “balance of power” along the construction payment food chain in the private sector. In particular, the provision allowing for expedited, binding arbitration could substantially limit the time it takes for disputes over payments to be resolved, during which time subcontractors typically go without payment. However, it is important to remember that, even though you may now resort to arbitration for late and/or non-payment of invoices, you must still comply with all the notice and recordkeeping requirements set forth in your contract in order to preserve your rights to make claims and avoid any waiver of claims you may have against the contractor and/or owner. In addition, before resorting to arbitration, it is important that you do your homework and determine the alleged reason as to why you have not been paid. You also need to establish a paper trail evidencing your receivable which can be used to prove your case at the arbitration. You do not want to go into arbitration only to find out the contractor/owner has a legitimate, or even pretextual, reason for not making payment, one that may have been easily remedied or disproved prior to the arbitration. Upcoming STA Breakfast Seminar- Please join us on January 13th for a comprehensive discussion on : GETTING PAID- The Amended NYS Prompt Payment Act and more.. Wednesday January 13, 2010 8am, Crowne Plaza: Goldberg & Connolly will be conducting this hour program which will review all the effective Subcontractor “Getting Paid” Strategies & Tactics. ( registration form is on the next page). Christopher K. Smith, an associate with the firm, assisted with the preparation of the article.

1 of 1 DOCUMENT

Copyright 2010 ALM Media Properties, LLC All Rights Reserved

Further duplication without permission is prohibited

New York Law Journal (Online)

April 20, 2010 Tuesday

LENGTH: 2047 words HEADLINE: Mandatory Arbitration in Construction Payment Disputes; Outside Counsel BYLINE: Robert J. MacPherson and Neal M. Eiseman,[email protected], Special to the new york law journal BODY: Arbitration recently has been garnering its fair share of attention. Congress is currently considering controversial legis-lation which would outlaw mandatory arbitration provisions in consumer, employment and franchise agreements.1 Judges are more frequently coaxing litigants to submit their dispute to binding arbitration before an independent neutral as a means of clearing out their overcrowded dockets. Since the enactment of the Federal Arbitration Act more than 85 years ago and myriad state statutes governing arbitration, one thing has always remained constant: For an arbitration to exist, the parties must first agree to arbitrate.

2 It now appears, however, that a statutory exception exists in New York which can force owners, contractors and subcontractors involved in payment disputes on private jobs to resolve them solely and exclusively via a binding arbi-tration proceeding. With little fanfare last September, New York's Construction Contract Prompt Payment Law3 was amended to provide that violations of the statute may be submitted to binding arbitration at the request of an "aggrieved party." Its purpose is to expedite payment of all monies owed to those who perform contracting services on private construction projects where the size of contract between the owner and the general contractor exceeds $150,000. A party who claims a violation of the prompt payment requirements is required to give written notice of the violation to the other party.4 If they cannot resolve the matter themselves the aggrieved party may, within 15 days of the other party having received notice of the complaint, refer the matter to "expedited arbitration pursuant to the Rules of the American Arbitration Association."5 The party receiving the notice is required to participate in the arbitration proceed-ing--independent of the fact that (i) the party never agreed to arbitrate and (ii) its written contract with the aggrieved party contemplates, by silence or otherwise, that if a dispute arises, the parties will resolve their disputes in court. At the conclusion of the arbitration, the arbitrator is to render an "opinion and award regarding the violation."6 The arbitrator's decision is final and may only be vacated in accordance with CPLR 75.7 According to the statute, a claim that a party has "violated" the Prompt Payment Law can be submitted to an arbitrator. But exactly what types of claims does that encompass and what type of relief may the arbitrator grant? This ambiguity raises a number of questions about the scope of the arbitration proceeding. Consider the following:

Mandatory Arbitration in Construction Payment Disputes; Outside Counsel New York Law Journal (Online) April 20,

2010 Tuesday

If a project owner disapproves a portion of an invoice, but pays the undisputed amount and sends a written explanation showing the reasons and calculation of the withholding, can the contractor challenge the calculation and ask the arbitra-tor to rule all or part of the withholding was improper? Or is the arbitrator limited to ruling whether disapproval was timely and whether the reasons were forth in writing, without getting into the substance of the calculation? If an invoice is disapproved because it includes a request for payment of extra work not yet approved, does the party seeking payment have the right to ask the arbitrator to determine that the extra work claims are valid and should be paid? If an invoice is not disapproved timely, can the arbitrator rule that the party disapproving the invoice has waived any right to object and must pay the invoice without hearing evidence on whether the amounts invoiced are valid? If the contract prohibits invoicing for extras or claims not incorporated via formal change orders, but does require any outstanding "claims" to be submitted with the final payment request, are those claims subject to arbitration if the final invoice including those claims is disapproved (or if not disapproved timely)? Two Sets of Rules The American Arbitration Association (AAA) has two sets of rules that would seem applicable to disputes under the statute, the Commercial Arbitration Rules and the Construction Industry Arbitration Rules.8 While both sets of rules contain procedures designed to shorten the time for the proceedings, only the procedures under the Commercial Rules are referred to as "Expedited Procedures."9 The Construction Rules use the term "Fast Track Procedures."10 The one significant difference is that the Fast Track Procedures call for a preliminary telephone conference and require the hearings be closed, meaning all hearings have been held and all evidence and arguments have been submitted to the arbitrator with 45 days after a preliminary conference.11 Both sets of procedures apply where the claim or counterclaim does not exceed $75,000 or where "the parties agree otherwise."12 All claimed violations of the Prompt Pay Law are subject to expedited arbitration regardless of the amount in dispute. Presumably, subject to the filing of a demand by the "aggrieved party," by participating in a project subject to New York's Prompt Payment Law the parties are deemed to have adopted the AAA's expedited procedures. Other features of the expedited procedures are limits on time extensions to respond to claims and counterclaims,13 tele-phone notice of hearings,14 selection of the arbitrator by the AAA if the parties cannot agree,15 exchange of exhibits two days before hearings,16 a presumption the dispute will be submitted solely on documents if the claim is less than $10,000,17 a hearing within 30 days of the arbitrator's appointment,18 a presumption the hearing will not exceed one day19 and awards to be rendered within 14 days from the close of the hearings.20 It remains to be seen whether the expe-dited process will allow for a full and fair hearing of what could be factually and legally complex payment disputes in-volving multiple parties. Other Changes In addition to the provisions regarding arbitration of disputes, other significant changes to the Prompt Payment Law include: Mandating payment by an owner of interim or final invoices within 30 days of approval of the invoice; Prohibiting contractors and subcontractors from withholding liquidated damages from progress payments; and Making void and unenforceable contract payment provisions that differ from those in the statute or provisions which state that arbitration as provided for in the statute is not available.2122 As originally enacted, the statute allowed the owner to set the time for payment of an invoice to the contractor. Under the new provisions the owner must pay the contractor within 30 days of approval of an invoice, unless payment is con-


2010 Tuesday

tingent upon lender approval in which case payment is due seven days after the lender has provided the funds to the owner.23 If an invoice has been disapproved in whole or part by the owner the only amount which may be withheld is an amount sufficient to pay the cots and expenses to cure the defects set forth in the written explanation for withholding payment. The owner may also withhold an amount sufficient to cover liquidated damages if provided for in the contract.24 Withholding Payment Contractors are required to pay subcontractors and suppliers and subcontractors are required to pay anyone downstream of them the full or proportionate amount of the money received from the owner within seven days of receiving pay-ment.25 Contractors and Subcontractors can withhold payments to those downstream for reasons similar to those for which an owner can withhold payment, such as defective work. However, contractors and Subcontractors can no longer withhold liquidated damages based on the liquidated damages set forth in the owner/contractor agreement. The statute is silent as to whether liquidated damages can be withheld if the subcontract provides for liquidated damages.26 A contractor intending to withhold money received from the owner or must, prior to the date payment is due i.e., within six days of their receiving payment, provide to the subcontractor and the owner a written notice setting forth the amount withheld, the reasons for the withholding citing the specific contract clauses and provisions of the statute justifying the withholding, the remedial action that must be taken to receive payment and any documents or waivers necessary. While the statute does not expressly require it, a subcontractor intending to withhold money due a sub-subcontractor or suppli-er would be well-advised to provide a similar written notice.27 Section 756-b, entitled "Remedies," contains new provisions allowing for violations of the statute to be submitted to arbitration at the request of an "aggrieved" party. As originally enacted the remedies included interest on late payments of at least 12 percent per year28 and the right to suspend work due to a failure to timely approve or disapprove an in-voice.29 Conclusion Apparently, the supporters of the recent revisions to the Prompt Payment Law required mandatory arbitration of pay-ment disputes because arbitration is viewed as a speedy, expeditious and less costly way to resolve disputes. That may well be the case, but it does raise a serious issue. The revisions run counter to the well-settled notion that parties cannot be compelled and must agree to use arbitration as the forum to resolve their disputes. No doubt it is just a matter of time before a disgruntled owner, contractor or subcontractor forced into an arbitration challenges the constitutionality of the mandatory arbitration provisions of the Prompt Pay Law. The claim will be that no one, not even the New York State Legislature, may take away their right to a jury trial.30 A law intended to reduce litigation may very well keep lawyers and courts busy for some time. Robert J. MacPhersonNeal M. Eiseman Endnotes: 1. The proposed federal Arbitration Fairness Act was re-introduced last year by Sen. Russell Feingold (D-Wi) (S. 931) and Rep. Henry Johnson (D-Ga) (HR 1020). Both versions of the bill are presently in committee. 2. With the exception of unilateral arbitration clauses which New York courts enforce because one party has agreed to permit the other party to decide whether they should proceed to arbitration (See e.g., Sablowsky v. The Edward S. Gor-don Company Inc., 73 N.Y.2d 133, 538 N.Y.S.2d 513, 525 N.E.2d 643 (N.Y. 1989)) and "fee arbitration" statutes requir-ing attorneys to notify their clients of the option of proceeding to arbitration to resolve attorney's fees disputes, unless the parties' agree to arbitrate, it is well-settled arbitration cannot occur. 3. Also known as General Business Law 756-758. 4. GBL 756b(3)(a).


2010 Tuesday

5. GBL 756b(3)(c). 6. GBL 756b(3)(d). 7. GBL 756b(3)(e); CPLR 7501 et. seq. 8. Available at www.adr.org. 9. Commercial Arbitration Rules, Expedited Procedures, E-1 to E-10. 10. Construction Industry Arbitration Rules Fast Track Procedures F-1 to F-13. 11. F-7; F-12. 12. Commercial Rules, R-1; Construction Rules R-1. 13. E-1. 14. E-3. 15. E-4(b). 16. E-5. 17. E-6. 18. E-7. 19. E-8. 20. E-9. 21. GBL 757(3)(4). Other changes include reducing the cost of projects to which the statute applies from $250,000 to $150,000, and changing the size of certain residential projects to which the statute will apply. 22. Some more background about the Prompt Payment statute: It applies to most private construction projects, with cer-tain exceptions for residential projects and projects involving the World Trade Center site GBL 756(1); 756e. The project owner is required to either approve or disapprove an invoice within 12 business days. An owner may disapprove all or part of an invoice for reasons set out in the statute, such as unsatisfactory progress, defective work, a failure to comply with a material provision of the contract or failure to make payments for labor or material. The reasons for dis-approval must be set forth in writing and delivered to the contractor GBL 756a(2)(a)(i). Contractors and subcontractors must also approve or disapprove invoices within 12 business days and can withhold submitting an invoice to the owner or contractor for similar reasons GBL 756a(2)(a)(ii). 23. GBL 756a(3)(a)(i). 24. GBL 756a(3)(a)(iv). 25. GBL 756a(3)(b)(i). 26. GBL 756a(3)(b)(ii). 27. GBL 756a(3)(a)(iv).


2010 Tuesday

28. GBL 756 b (1)(a) and (b). 29. GBL 756b(2)(a) and (b). 30. U.S. Constitution, Amendment VII; New York Constitution, Article VI 818. LOAD-DATE: September 20, 2011

New YorkNew York’’s s ““Prompt PayPrompt Pay”” Act: Act: An Underutilized Tool For An Underutilized Tool For Getting Your Client PaidGetting Your Client Paid

••Joel Joel SciasciaSciascia PavariniPavarini McGovern LLCMcGovern LLC••Neal Neal EisemanEiseman Goetz Fitzpatrick Goetz Fitzpatrick LLPLLP••Henry L. Goldberg Henry L. Goldberg GoldbergGoldberg & Connolly& Connolly••Michael Michael MarraMarra American Arbitration American Arbitration AssociationAssociation••Robbie MacPherson Robbie MacPherson –– Gibbons P.C.Gibbons P.C.

11

IT IS THE POLICY AND PURPOSE OF THIS ARTICLE TO IT IS THE POLICY AND PURPOSE OF THIS ARTICLE TO EXPEDITE PAYMENT OF ALL MONIES OWED TO THOSE EXPEDITE PAYMENT OF ALL MONIES OWED TO THOSE WHO PERFORM CONTRACTING SERVICES PURSUANT WHO PERFORM CONTRACTING SERVICES PURSUANT TO CONSTRUCTION CONTRACTSTO CONSTRUCTION CONTRACTS

Section 756Section 756--a a -- ““Except as otherwise Except as otherwise provided in this article, the terms and provided in this article, the terms and conditions of a construction contract shall conditions of a construction contract shall supercede the provisions of this article supercede the provisions of this article and govern the conduct of the parties and govern the conduct of the parties thereto.thereto.””

THE LAW WILL NOW SUPERCEDE ANY THE LAW WILL NOW SUPERCEDE ANY CONTRACT PAYMENT TERMSCONTRACT PAYMENT TERMS 22

APPLICATIONAPPLICATION -- Construction Contracts Construction Contracts Valued at Valued at $150,00$150,00 (($250,000$250,000) ) or Greater or Greater Except:Except:

•• All public work by State All public work by State and Local governments, and Local governments, public benefit public benefit corporations or public corporations or public corporationscorporations

•• Residential work of 1, 2 Residential work of 1, 2 and 3 family dwellings, and 3 family dwellings,

•• Residential tract Residential tract development of development of 100100(150) units or less(150) units or less

•• Residential project of Residential project of an aggregate size of an aggregate size of 45004500 (9,000) sq. ft. or (9,000) sq. ft. or lessless

•• Residential project of Residential project of fewer than fewer than 7575 (150) (150) units with public units with public financing for financing for individuals earning individuals earning 80% of the HUD 80% of the HUD Median incomeMedian income

33

BILLING CYCLEBILLING CYCLE

By mutual agreement, or (absent that)By mutual agreement, or (absent that)The calendar month within which the The calendar month within which the work is performedwork is performedContractor can invoice at end of Billing Contractor can invoice at end of Billing CycleCycleBilling Cycle could be 45, 60 or more Billing Cycle could be 45, 60 or more daysdays

44

INVOICES INVOICES -- Contractor to Contractor to OwnerOwner

Owner to approve or disapprove within Owner to approve or disapprove within 12 business days of delivery of invoice 12 business days of delivery of invoice and and ““all contractually required all contractually required documentationdocumentation””If the owner disapproves all or a If the owner disapproves all or a portion of the invoice, he must provide portion of the invoice, he must provide a written statement describing what a written statement describing what has been disapprovedhas been disapproved

55

VALID REASONS FOR VALID REASONS FOR DISAPPROVALDISAPPROVAL

Unsatisfactory or Unsatisfactory or disputed job disputed job progressprogressDefective Defective construction work construction work or material not or material not remediedremediedDisputed work Disputed work materialsmaterialsFailure to comply Failure to comply with other material with other material provisions of the provisions of the

it ti

Failure to make timely Failure to make timely payments for labor payments for labor (including collectively (including collectively bargained fringe benefit bargained fringe benefit funds), equipment and funds), equipment and materialmaterialDamage to the ownerDamage to the ownerEvidence contract canEvidence contract can’’t t be completed for be completed for outstanding contract outstanding contract sumsumFailure of architect to Failure of architect to certify payment for certify payment for reasons abovereasons above

66

INVOICES INVOICES -- Subcontractor to Subcontractor to ContractorContractor

Contractor to approve or disapprove in 12 Contractor to approve or disapprove in 12 business daysbusiness daysIf the contractor disapproves all or a If the contractor disapproves all or a portion of the invoice, he must provide a portion of the invoice, he must provide a written statement describing what has written statement describing what has been disapprovedbeen disapprovedHow does this square with practical How does this square with practical timing of requisition process?timing of requisition process?What kind of waivers should be required What kind of waivers should be required with the subwith the sub’’s application?s application?

77

VALID REASONS FOR VALID REASONS FOR DISAPPROVALDISAPPROVAL

Unsatisfactory or Unsatisfactory or disputed job progressdisputed job progressDefective construction Defective construction work or material not work or material not remediedremediedDisputed workDisputed workFailure to comply with Failure to comply with other material other material provisions of the provisions of the construction contractconstruction contract

Failure to make timely Failure to make timely payments for labor payments for labor (including collectively (including collectively bargained fringe benefit bargained fringe benefit funds), equip. and funds), equip. and materialmaterialDamage to the Damage to the contractor, another contractor, another subcontractor or subcontractor or material suppliermaterial supplierEvidence contract canEvidence contract can’’t t be completed for be completed for outstanding contract outstanding contract sumsum

88

““Nothing in this subdivision shall Nothing in this subdivision shall authorize the withholding of an authorize the withholding of an application to the owner or contractor application to the owner or contractor for the payment to a subcontractor or for the payment to a subcontractor or material supplier when due to a delay material supplier when due to a delay in job progress by the owner, in job progress by the owner, contractor or another subcontractor or contractor or another subcontractor or material supplier other than the material supplier other than the applicantapplicant’’s subcontractor or material s subcontractor or material supplier.supplier.””

99

Payment Due Date Payment Due Date --Owner to ContractorOwner to Contractor

Old LawOld Law--Per contractual agreementPer contractual agreementAS AMENDEDAS AMENDED

Within 30 days (business or calendar?) Within 30 days (business or calendar?) of approval, orof approval, orWithin 7 days after securing funds Within 7 days after securing funds from a lender provided timely request from a lender provided timely request mademade

1010

Payment Due DatePayment Due Date--Contractor to Contractor to Subcontractor/SupplierSubcontractor/Supplier

Within 7 Days of Receipt of Money from Within 7 Days of Receipt of Money from upstream partyupstream party

““Provided all contractually required Provided all contractually required documentation and waivers are receiveddocumentation and waivers are received””

1111

WHAT CAN OWNER WHAT CAN OWNER WITHHOLDWITHHOLD

Only an amount sufficient to pay the Only an amount sufficient to pay the costs to cover a defectcosts to cover a defect

ororAn amount not to exceed the line item An amount not to exceed the line item

in an agreed schedule of valuesin an agreed schedule of valuesandand

An amount sufficient to cover An amount sufficient to cover liquidated damages agreed in liquidated damages agreed in contractcontract

1212

WHAT CAN CONTRACTOR WHAT CAN CONTRACTOR WITHHOLDWITHHOLD

The same as the OwnerThe same as the OwnerEXCEPTEXCEPT

Provision allowing a Contractor to Provision allowing a Contractor to withhold liquidated damages as withhold liquidated damages as ““agreed upon in the construction agreed upon in the construction contractcontract”” has been deleted.has been deleted.Can a Contractor withhold liquidated Can a Contractor withhold liquidated damages if agreed on in a damages if agreed on in a ““SubcontractSubcontract””?? 1313

Withholding of Withholding of Subcontractor PaymentSubcontractor PaymentAfter Owner ApprovalAfter Owner Approval

““If a contractor, If a contractor, after submitting an after submitting an invoice to an invoice to an ownerowner……but before but before making a making a paymentpayment……discovers discovers that all or a portion that all or a portion due to the due to the subcontractor or subcontractor or material supplier is material supplier is subject to subject to withholdingwithholding…”…”

Prior to due date advise Prior to due date advise subcontractor subcontractor and and owner owner money will be money will be withheldwithheldWritten notice must Written notice must state:state:–– Amount to be withheldAmount to be withheld–– Specific causesSpecific causes–– Remedial action requiredRemedial action required–– Documentation and Documentation and

waivers requiredwaivers required

1414

OBLIGATION TO DISCLOSEOBLIGATION TO DISCLOSEPAYMENTSPAYMENTS

Upon request of Subcontractor Owner must give notice to Upon request of Subcontractor Owner must give notice to Subcontractor within 5 days of making payment to ContractorSubcontractor within 5 days of making payment to Contractor

Contractors and Subcontractors must disclose to those Contractors and Subcontractors must disclose to those downstream date payment is due themdownstream date payment is due them

Failure to disclose creates an obligation to pay as if the OwnerFailure to disclose creates an obligation to pay as if the Ownermet the dates in the Statutemet the dates in the Statute

With amendments mandating payment in 30 days after With amendments mandating payment in 30 days after approval only disclosure that may be necessary would be approval only disclosure that may be necessary would be payment cycle in excess of 30 dayspayment cycle in excess of 30 days

Must Contractors and Subcontractors disclose due date for Must Contractors and Subcontractors disclose due date for each Billing Cycle ?each Billing Cycle ?

1515

Remedies For Late Remedies For Late Payment or NonPayment or Non--ApprovalApproval

Interest Interest –– 1% per month or higher as per contract1% per month or higher as per contract

Suspension of the WorkSuspension of the Work–– 10 calendar day notice to cure10 calendar day notice to cure–– Not a breach of contractNot a breach of contract–– Reimbursement for remobilizationReimbursement for remobilization–– Extension of contract timeExtension of contract time

1616

RetainageRetainage

By mutual agreement By mutual agreement ““a reasonable a reasonable amountamount””Contractor may hold no more on Contractor may hold no more on subcontractor than owner holds on subcontractor than owner holds on himhimTo be released 30 days after final To be released 30 days after final approval of the work (interest on late approval of the work (interest on late release at 1% per month)release at 1% per month)

1717

LENDER INVOLVEDLENDER INVOLVED

Payment due date extended to 7 days Payment due date extended to 7 days after loan proceeds are received ifafter loan proceeds are received ifOwner, Contractor or Subcontractor has Owner, Contractor or Subcontractor has

obtained a loan to pay for all or part of obtained a loan to pay for all or part of ““Construction ContractConstruction Contract””

What does this mean when applied to contractors What does this mean when applied to contractors and subcontractors ?and subcontractors ?

Timely request has been made to disburse loanTimely request has been made to disburse loan

Lender is obligated to disburse but has notLender is obligated to disburse but has not1818

ACT DOES NOT APPLY TO WORK, ACT DOES NOT APPLY TO WORK, INCLUDING PRIVATE WORK, AT INCLUDING PRIVATE WORK, AT THE WORLD TRADE CENTERTHE WORLD TRADE CENTER

1919

WTC EXCEPTION

Void ProvisionsVoid Provisions

Contracts [except material supply contracts] Contracts [except material supply contracts] subject to the laws of another statesubject to the laws of another stateContracts requiring litigation, arbitration or Contracts requiring litigation, arbitration or other dispute resolution procedure to be other dispute resolution procedure to be conducted in another stateconducted in another stateContract requirement prohibiting suspension Contract requirement prohibiting suspension of the contract for nonof the contract for non--paymentpaymentContracts prohibiting expedited Contracts prohibiting expedited

arbitration for payment disputesarbitration for payment disputesContracts establishing payment Contracts establishing payment provisions that differ from the Prompt provisions that differ from the Prompt Pay LawPay Law..

2020

Right to Attempt to Resolve Right to Attempt to Resolve Payment Dispute and Demand Payment Dispute and Demand Arbitration Arbitration

Section 756 Section 756 –– b. Remediesb. Remedies

Paragraph 3Paragraph 3

–– (c) If efforts to resolve such matter to the (c) If efforts to resolve such matter to the satisfaction of all parties are unsuccessful, satisfaction of all parties are unsuccessful, the aggrieved party may refer the matter, not the aggrieved party may refer the matter, not less than fifteen days of the receipt of third less than fifteen days of the receipt of third party verification of delivery of the complaint, party verification of delivery of the complaint, to the American Arbitration Association for an to the American Arbitration Association for an expedited arbitration pursuant to the Rules of expedited arbitration pursuant to the Rules of the American Arbitration Association.the American Arbitration Association.

2121

2222

Authority to ProceedAuthority to Proceedscenario 1scenario 1

PartiesParties’’ contract provides for contract provides for AAA arbitration: File Demand AAA arbitration: File Demand for arbitration.for arbitration.

2323

Authority to Proceed Authority to Proceed scenario 2scenario 2

No Agreement to use AAA No Agreement to use AAA Arbitration:Arbitration:

File a Demand, reference claim File a Demand, reference claim arising from statute; include copy of arising from statute; include copy of communication requesting payment.communication requesting payment.

2424

AAA Intake ProcessAAA Intake Process

Case Filing Service staff reviews initial Case Filing Service staff reviews initial filing to confirm initial source of filing to confirm initial source of authority for AAA to proceed; assigns authority for AAA to proceed; assigns case to North East Case Management case to North East Case Management Center staff for administration.Center staff for administration.

2525

ArbitrabilityArbitrabilityscenario 1scenario 1

Respondent objects to proceeding based Respondent objects to proceeding based on a lack of agreement to arbitrate: if the on a lack of agreement to arbitrate: if the claimant has cited statute as source of claimant has cited statute as source of authority, AAA shall proceed with authority, AAA shall proceed with administration of the case and refer the administration of the case and refer the arbitrabilityarbitrability question to an arbitrator as a question to an arbitrator as a threshold issue (AAA Rule Rthreshold issue (AAA Rule R--9). 9).

2626

ArbitrabilityArbitrabilityScenario 2Scenario 2

Respondent argues claimant has not Respondent argues claimant has not complied with statutory requirements: complied with statutory requirements: AAA shall proceed with administration AAA shall proceed with administration and refer the issue to the arbitrator as and refer the issue to the arbitrator as a threshold issue (Ra threshold issue (R--9).9).

2727

The issue before the American Arbitration The issue before the American Arbitration Association (Association (““AAAAAA””) is whether the filing ) is whether the filing requirements contained in the AAArequirements contained in the AAA’’s Rules have s Rules have been met by the Claimant.been met by the Claimant. After review of the After review of the file, the AAA has made an administrative file, the AAA has made an administrative determination that Claimant has met the filing determination that Claimant has met the filing requirements by filing a demand for arbitration requirements by filing a demand for arbitration providing for administration by the AAA under its providing for administration by the AAA under its Rules.Rules. Accordingly, in the absence of an Accordingly, in the absence of an agreement by the parties or a court order staying agreement by the parties or a court order staying this matter, the AAA will proceed with the this matter, the AAA will proceed with the administration of the arbitration. administration of the arbitration.

2828

In neither instance is the AAA determining the arbitrability of the

issue.

2929

Mandatory Arbitration: A violation of the statute may be submitted to binding arbitration at the request of an aggrieved party. . .

The Scope of the The Scope of the Arbitration:Arbitration:

Who decides?Who decides?Are there any limitations?Are there any limitations?

3030

Hypothetical # 1Hypothetical # 1

G.CG.C. submits a requisition/bill. Within . submits a requisition/bill. Within 12 days, Owner objects in writing to a 12 days, Owner objects in writing to a portion of it, claiming some of the portion of it, claiming some of the work is not within spec and defective. work is not within spec and defective. G.CG.C. files a demand for arbitration. . files a demand for arbitration. Owner objects, claiming arbitration is Owner objects, claiming arbitration is only available if the Owner fails to set only available if the Owner fails to set forth its objections in a timely manner. forth its objections in a timely manner. It is the dispute It is the dispute arbitrablearbitrable? ?

3131

Hypothetical # 2Hypothetical # 2

G.CG.C. submits its requisition/bill. One week after the . submits its requisition/bill. One week after the 1212--day statutory period to approve or disapprove all day statutory period to approve or disapprove all or part of it, Owner rejects 50%, claiming or part of it, Owner rejects 50%, claiming ““doubledouble--dipping.dipping.”” G.CG.C. then suspends performance and . then suspends performance and demands arbitration, claiming it is an demands arbitration, claiming it is an ““aggrieved aggrieved party.party.”” Can the arbitrator rule that the entire bill Can the arbitrator rule that the entire bill must be paid because the Owner blew the 12must be paid because the Owner blew the 12--day day period to object? Can the arbitrator go back, period to object? Can the arbitrator go back, disregard the absence of the 12disregard the absence of the 12--day notice and day notice and decide the dispute on the merits?decide the dispute on the merits?

3232

Hypothetical # 3 Hypothetical # 3

G.CG.C. submits a request for change . submits a request for change order and Owner disapproves it order and Owner disapproves it because the work has not yet been because the work has not yet been approved. Thereafter, approved. Thereafter, G.CG.C. demands . demands arbitration seeking to have the arbitration seeking to have the arbitrator determine that the extra arbitrator determine that the extra work claim is valid and should be paid. work claim is valid and should be paid. Does the statute permit this?Does the statute permit this?

3333

Once in arbitration, may a party Once in arbitration, may a party recover:recover:attorneysattorneys’’ fees ?fees ?arbitrator compensation and/or costs?arbitrator compensation and/or costs?

3434

What is the format of the What is the format of the hearings?hearings?1.1. ““On the papersOn the papers””2.2. Live testimonyLive testimony3.3. Are there any limitations on the Are there any limitations on the

length of the presentations?length of the presentations?

3535

Assignment of Assignment of Construction RulesConstruction Rules

Section RSection R--1 of the AAA1 of the AAA’’s Construction Industry s Construction Industry Arbitration Rules, amended and effective October Arbitration Rules, amended and effective October 1, 2009 allows the AAA to assign a construction1, 2009 allows the AAA to assign a construction--related dispute to the Construction Rules when related dispute to the Construction Rules when the parties have agreed to use the AAA, even if the parties have agreed to use the AAA, even if they have not specified the Construction Rules.they have not specified the Construction Rules.

3636

Assignment to Fast TrackAssignment to Fast Track

The language of the statute does The language of the statute does not identify a specific set of AAA not identify a specific set of AAA rules or a track within AAA rules. rules or a track within AAA rules. The mere use of the word The mere use of the word ““expeditedexpedited”” without reference to without reference to the Commercial Rules does not the Commercial Rules does not require the application of the require the application of the Commercial Expedited Procedures. Commercial Expedited Procedures.

3737

Fast TrackFast Track

It is the intent of the AAA to apply the Fast Track It is the intent of the AAA to apply the Fast Track of the Construction Rules to cases with claims of the Construction Rules to cases with claims relating to prompt payment issues, even if the relating to prompt payment issues, even if the claim size exceeds $75,000.claim size exceeds $75,000.

Should the parties not comply with the terms of Should the parties not comply with the terms of the Fast Track or should the partiesthe Fast Track or should the parties’’ dispute dispute include other claims, the AAA or the arbitrator include other claims, the AAA or the arbitrator may assign the case to one of the other tracks of may assign the case to one of the other tracks of the rules. the rules.

Parties may also agree to opt into the Regular or Parties may also agree to opt into the Regular or LCCLCC track should they agree that the case cannot track should they agree that the case cannot be resolved within the parameters of the Fast be resolved within the parameters of the Fast Track. This issue shall be discussed during the Track. This issue shall be discussed during the preliminary management hearing.preliminary management hearing.

3838

Fast Track HighlightsFast Track HighlightsSingle ArbitratorSingle ArbitratorPreliminary Management Hearing within Preliminary Management Hearing within 10 business days of confirmation of 10 business days of confirmation of appointment of arbitratorappointment of arbitratorTime Standards (FTime Standards (F--12) 12) No discoveryNo discovery14 days from close of hearing for Award 14 days from close of hearing for Award In most cases, flat rate for all arbitrator In most cases, flat rate for all arbitrator compensationcompensation

3939

Optional procedures for the Optional procedures for the Resolution of disputes through Resolution of disputes through document Submissiondocument Submission

Parties may agree to use DParties may agree to use D--Section of Section of rules. rules. No inNo in--person hearing.person hearing.

Good for single issue, document focused Good for single issue, document focused cases. cases.

4040

The ArbitratorThe Arbitrator’’s Award:s Award:

How How finalfinal is final?is final?

4141

AAA Panel of Construction AAA Panel of Construction ArbitratorsArbitrators

Must have minimum 10 years Must have minimum 10 years experience in their field; most have 15 experience in their field; most have 15 or more.or more.Attorneys must have minimum of 50% Attorneys must have minimum of 50% of practice in construction law and of practice in construction law and most have closer to 75%most have closer to 75%-- 100%.100%.Required Required ADRADR training.training.All NY arbitrators for cases arising All NY arbitrators for cases arising under this statute. under this statute. 4242

AAA Case ManagementAAA Case Management

Dedicated Case Manager.Dedicated Case Manager.Each case individually managed; no Each case individually managed; no docket.docket.Construction focused staff team.Construction focused staff team.NECMCNECMC cases managers trained cases managers trained ADRADRservice providers. service providers. National Case Management National Case Management Department support.Department support.

4343

Practice PointersPractice Pointers

Specify and include in contract or Specify and include in contract or subcontract sample documentation subcontract sample documentation required with payment applications required with payment applications (e.g. lien waivers, insurance certificates, (e.g. lien waivers, insurance certificates, tests and inspection reports, etc.)tests and inspection reports, etc.)

Educate Owner Representatives, Project Educate Owner Representatives, Project Managers and Superintendents to Managers and Superintendents to document nondocument non--performanceperformance

4444

Many believe the law has had Many believe the law has had little impact since first enacted little impact since first enacted in 2003. Will that remain the in 2003. Will that remain the case ?case ?

4545

12. Ambiguity or weakness as to what governs particular provisions:

Parties Contract (“Mutual Agreement”) vs. the Act.(Note 2009 Amendments)

11. Limitations on application of Act (i.e., type of project) eliminates parties that need its potential benefits the most.

10. The contractor cannot simply walk off the job if not paid; the contractor can only “suspend” performance upon ten (10) days written notice of intent to suspend work with “opportunity to cure”. (§756-b(2)(a)(i))

– “Feels” counterintuitive.– The contractor also runs the risk, if it does walk off, that it will be in

breach if it is ultimately determined that the dispute did not involve approved (or undisputed) pay requisitions.

“DIRTY DOZEN” REASONS WHY PROMPT PAY ACT MAY NOT BE SO PROMPT

9. “Mandatory” arbitration can simply be written out by contract.(See Southgate Owners Corp. v. KNS Building Restoration, Slip Opinion, Supreme Court, County of New York, Index No. 651927/2013). Currently under appeal to App. Div., 1st Dept.

8. Only two reported arbitrations concerning the Act in 4 years (2009 – 2013).

So why should I be the guinea pig??

7. Strict dictates (e.g., 12 day “tripwire” for approval of invoices) on owner and GC are equally applicable to subcontractors which have less ability to administer.(Legislature attempted to be “fair,” but parties are not equal in

resources.)


6. Important loophole for failure of lender to distribute funds. (§756-d)

“The date of payment required by the owner, the contractor and/orsubcontractor pursuant to Section 756-A of the Article, shall be extended to the seventh day after the owner, contractor and subcontractor, as the case may be, receives loan proceeds necessary to make such payment...”(But see, Westfair)

Or “This job is going South!”

5. Grounds for withholding of funds undermines the Act.

4. Grounds for disapproval of invoices undermines the Act.


3. The “prompt” in The Prompt Payment Act may be illusionary.- Freedom to Contract “Promptness” Out;- Numerous grounds to reject invoices;- Numerous grounds to withhold funds and correct; - Etc.

The parties can, for example, frustrate prompt payment through “mutual agreement” regarding Payment Cycle provisions. Section 756-a (1) provides:

“Billing cycle. The parties to a construction contract may, by mutual agreement, establish a billing cycle for the submission of invoices requesting payment for work performed pursuant to a construction contract.”

(Thus, effectively delays payment, even though the law requires “payment no later than 30 days after invoice approval”.) 2009 Amendment (§756-a 3 (ii))


2. The Act applies only to “approved” pay requisitions. (§756 a (2)(i))

The owner can withhold approval for any of the following:

(1) Unsatisfactory or disputed job progress;(2) Defective construction work or material not remedied;(3) Disputed work materials;(4) Failure to comply with other material provisions of the construction contract;(5) Failure of the contractor to make timely payments for labor;(6) Failure of owner’s architect to certify payment “for any reason”provided only that reason is cited in owner’s written statement of disapproval.


1. The Act applies only to private contacts which are

fundamentally based upon personal relationships.

May be reason for historically dismal utilization.


12. Ambiguity or weakness as to what governs particular provisions:

- Parties Contract (“Mutual Agreement”) vs. the Act. (Note 2009 Amendments)

11. Limitations on application of Act (i.e., type of project) eliminates parties

that need its potential benefits the most.

10. The contractor cannot simply walk off the job if not paid; the contractor can only “suspend” performance upon ten (10) days written notice of intent to suspend work with “opportunity to cure”. (§756-b(2)(a)(i))

“Feels” counterintuitive. The contractor also runs the risk, if it does walk off, that it will be in breach if it is ultimately determined that the dispute did not involve approved (or undisputed) pay requisitions.

9. “Mandatory” arbitration can simply be written out by contract.

(See Southgate Owners Corp. v. KNS Building Restoration, Slip Opinion, Supreme Court, County of New York, Index No. 651927/2013). Currently under appeal to App. Div., 1st Dept.

8. Only two reported arbitrations concerning the Act in 11 years (2002 – 2013).

So why should I be the guinea pig??

7. Strict dictates (e.g., 12 day “tripwire” for approval of invoices) on owner and GC are equally applicable to subcontractors which have less ability to administer.

(Legislature attempted to be “fair,” but parties are not equal in resources.)


6. Important loophole for failure of lender to distribute funds. (§756-d)

“The date of payment required by the owner, the contractor and/or subcontractor pursuant to Section 756-A of the Article, shall be extended to the seventh day after the owner, contractor and subcontractor, as the case may be, receives loan proceeds necessary to make such payment...” (But see, Westfair)

Or

“This job is going South!”

5. Grounds for withholding of funds undermines the Act.

4. Grounds for disapproval of invoices undermines the Act.

3. The “prompt” in The Prompt Payment Act may be illusionary.

- Freedom to Contract “Promptness” Out; - Numerous grounds to reject invoices; - Numerous grounds to withhold funds and correct; - Etc.

The parties can, for example, frustrate prompt payment through “mutual agreement” regarding Payment Cycle provisions. Section 756-a (1) provides:

“Billing cycle. The parties to a construction contract may, by mutual agreement, establish a billing cycle for the submission of invoices requesting payment for work performed pursuant to a construction contract.” (Thus, effectively delays payment, even though the law requires “payment no later than 30 days after invoice approval”.) 2009 Amendment (§756-a 3 (ii))

2. The Act applies only to “approved” pay requisitions. (§756-a (2)(i))

The owner can withhold approval for any of the following:

(1) Unsatisfactory or disputed job progress; (2) Defective construction work or material not remedied;

(3) Disputed work materials; (4) Failure to comply with other material provisions of the construction

contract; (5) Failure of the contractor to make timely payments for labor; (6) Failure of owner’s architect to certify payment “for any reason” provided

only that reason is cited in owner’s written statement of disapproval. 1. The Act applies only to private contacts which are fundamentally based

upon personal relationships. May be reason for historically dismal utilization.

© Goldberg & Connolly Sept. 2013

Faculty Biographies

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CONSTRUCTION LITIGATION, ARBITRATION AND MEDIATION

CONSTRUCTION CONTRACTS AND TRANSACTIONS

COMMERCIAL LITIGATION

EDUCATIONSt. John's University School of Law, J.D.The George Washington University, B.A., Journalism and Political Science

ADMISSIONSNew York

For 30 years, commercial litigator Neal Eiseman has provided legal services to a widevariety of corporate clients in the construction and real estate industries. Representingreal estate developers, lenders, owners, construction managers, contractors,manufacturers and design professionals, he advises clients in both the transactional andlitigation aspects of commercial and real estate law.

Neal's commitment to his practice extends beyond the courtroom. He serves on theConstruction Arbitration Master Panel, the Panel of Arbitrators and the Panel ofMediators of the American Arbitration Association, and has served on thatorganization’s Regional Construction Attorney Advisory Counsel. He has also servedas an arbitrator for New York City's Civil Court, and founded the Bergen County BarAssociation’s Construction Law Committee.

As an Adjunct Professor at New York University, he teaches masters courses inconstruction and real estate law and negotiation and dispute resolution. He is a regularguest speaker at events held by the American Bar Association, the AmericanArbitration Association and various construction trade associations. Last March, Nealspoke at the American Bar Association’s Annual Litigation Conference in Chicagoabout “Dealing with Attorneys Who Don’t Play Well in the Sandbox: IdentifyingTactics Intended to Derail Your Arbitration and How Best to Thwart Them.” Nextmonth Neal will be teaching an intensive mediator training program entitled “EssentialMediation Skills for the New Mediator” in New York on behalf of the AmericanArbitration Association.

He has written extensively about construction and commercial issues for various legalpublications. His latest opinion piece titled "Who Will Step Up to ProtectPolicyholders?" appeared in the April 19, 2012 edition of the New York Law Journal.This spring Neal co-authored an article entitled "A Tale of Two Lawyers: HowArbitrators and Advocates Can Avoid the Dangerous Convergence of Arbitration andLitigation" for the Cardozo Law School's Journal of Conflict Resolution.

Earlier this year, Neal obtained a unanimous reversal of an adverse decision of a NewYork federal trial court when the Second Circuit Court of Appeals held that a“Residential Exclusion” rider in a comprehensive general liability insurance policy doesnot permit a contractor’s insurance company to disclaim coverage because the projectin question involves the construction of a residential condominium project.

A member of the American and New York State Bar Associations, the New YorkCounty Lawyers' Association and ABA Sections in Construction and Litigation, Neal iscurrently Co-Chair of the ABA's Committee on Arbitration. He is also a member ofthe New York University Schack Institute of Real Estate/Construction ManagementAdvisory Board and is a Fellow in the College of Commercial Arbitrators.

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Neal is rated AV Preeminent by Martindale-Hubbell and has been recognized as a"Super Lawyer®" in the field of construction law every year since 2007. In 2011, 2012and 2013, he was named a "Best Lawyer in America®" in the specialty of construction.Neal was named one of Bergen County, New Jersey's "Top Lawyers" in (201)Magazine. Chambers USA referred to Neal as "very intelligent" and "a breath of freshair," praising him for his ability to "bring to the table a pragmatic approach."

Neal M. Eisemanonline at

visitsuperlawyers.com

U.S. District Court, Southern District of New YorkU.S. District Court, Eastern District of New YorkU.S. Court of Appeals for the Second CircuitU.S. Supreme CourtNew JerseyU.S. District Court for New Jersey

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Attorneys

Henry L. Goldberg

Janet M. Connolly( Retired )

Mitchell B. Reiter

William James Tinsley, Jr.

Erik A. Ortmann

Eugene Drexler

Darrell Harp

Norman A. Steiger

Brian P. Craig

Theresa Brennan Murphy

Michael J. Rosenthal

Christopher K. Smith

Clinton S. Hein

Jeffrey I. Scott

Paralegal

Bernice Augustus

Director of Administration

Julie Wyetzner

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ATTORNEYS Henry L. Goldberg

Henry L. Goldberg, Esq., Managing Partner of the law firm ofGoldberg & Connolly, Rockville Centre, New York, is a prominentauthority in construction law and government contracting.

Consistent with this experience, Mr. Goldberg enjoys a workingrelationship with the leadership of most contracting agencies in thearea. He is a member of the MOLES, a fraternal engineeringorganization of the heavy construction industry, and the mostprestigious organization of its kind in the world.

Mr. Goldberg is Counsel to the Construction ManagementAssociation of America (CMAA) for the Metro New York / New JerseyChapter. He is also Counsel to the Subcontractors Trade Association(STA) and past-president the New York City Chapter of theConstruction Financial Management Association and is a foundingBoard Member and Counsel to the Long Island Chapter. He has alsoserved as Chairman of the New York Building Congress PublicProcurement Committee.

Mr. Goldberg is also active in most other construction industryassociations including the Associated General Contractors ofAmerica and New York State, the General Contractors Association ofNew York, the Construction Industry Council of Westchester andHudson Valley, the Long Island Contractors Association, theConstruction Management Association of America, the NationalContract Management Association, and the American BarAssociation's Public Contract Law, Fidelity and Surety Law,Construction Litigation and Construction Industry ForumCommittees. He also serves on the "National Advisory Committee"of The Journal of Construction Accounting and Taxation published byWarren Gorham & Lamont and was recently appointed as ExpertAdvisor to the American Arbitration Association.

Mr. Goldberg serves as Editor-in-Chief of the 2011 Edition of FederalContract Management: A Manual for the Contract Professional,

which is now available for purchase exclusively on LexisNexis.com.

He has long held Martindale-Hubbell's highest AV Preeminent™ rating and has continually been recognizedby Thomson Reuters' Super Lawyers® as a top construction attorney in the New York Metro area.

Mr. Goldberg is a graduate of Cornell University and Fordham Law School. He received his Bachelor ofScience in Industrial and Labor Relations in 1971 and his J.D. in 1974.

"The practice of law is the "ultimate service profession." The mission is completed only when the problemis successfully avoided, mitigated or resolved. Merely going through the motions-whether in delicatenegotiations or complex litigation-does not lead to extraordinary results. I have always sought to lead andmotivate our legal team to "go the extra mile" in pursuit of our clients' goals. It is important to "play hard"as well. For me, it's downhill skiing, competitive sailing or a round of golf. Last year I had the uniquepleasure of assisting our pet Weimaraner to whelp six healthy pups."

© 2004 - 2013 Goldberg & Connolly. All Rights Reserved. | Attorney Advertising | Disclaimer | Privacy PolicyGoldberg & Connolly - 66 North Village Avenue, Rockville Centre, NY 11570 - Tel: 516.764.2800 - Fax: 516.764.2827

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Robert J. MacPhersonRobert J. MacPherson is a Fellow of the American College of Construction Lawyersand former Chair of the ABA Forum on the Construction Industry. He has beenpracticing construction law since 1981, focusing his practice on drafting andnegotiating contracts relating to construction projects and the resolution, throughnegotiation, mediation, arbitration and litigation, of construction disputes. He isadmitted to practice in the State and Federal Courts in New Jersey and New York.

Mr. MacPherson regularly acts as construction contract and disputes counsel forcontractors, subcontractors suppliers and owners involved in building and heavy civilconstruction for public and private work. He has been lead counsel in disputesinvolving contract termination (both prosecuting on behalf of owners and defendingon behalf of contractors), liens, surety bonds, extra work claims, defective workclaims, scheduling and delays.

He teaches Construction Law at Rutgers Law School, Newark, NJ.

Mr. MacPherson also acts as a mediator and arbitrator and has been involved indeveloping and conducting mediation education and training programs in NewJersey. He taught Alternative Dispute Resolution at Rutgers Law School from 1996until 2004.

Representative Matters

Defended cooperative housing corporation in action by municipality seeking over $20Million for the repair of the concrete encased columns and slab supporting the coop’sbuilding over a major urban highway. Issues include legality of emergency contractlet without public bidding, access rights to public roadway to maintain coop’sstructures, impossibility of performance, beach of implied contractual duties andliability of municipality for corrosive effect of road deicing materials on coop’sconcrete structures.

Negotiated a $120 Million contract for the design and construction of what will be theheadquarters campus of a major pharmaceutical company.

Advised a public agency on construction contract issues involving a public-privatepartnership on P3 project.

Negotiated EPC, Fuel Supply and Operation and Maintenance agreements for a 50MW bio mass fueled combined heat and power plant with a value in excess of €120Million.

Assisted German wind turbine manufacturer in redrafting its supply contracts for usein the United States.

Negotiation of EPC contracts for several solar projects in New Jersey.

Represented a foundation in the negotiation of a $500 million constructionmanagement agreement.

Negotiated a $180 Million construction management agreement for a major retaildevelopment on a “Brownfield” site in Brooklyn, New York. Advised the constructionmanager on issues that arose during construction.

Robert J. MacPhersonDirectorBusiness & CommercialLitigation

Practice AreasAlternative DisputeResolutionBusiness & CommercialLitigationConstructionSandy Relief Task Force

Contact InformationOne Gateway CenterNewark, NJ 07102-5310

Direct: 973-596-4811Fax: [email protected] V-Card

© 2013 Gibbons P.C., All Rights Reserved. http://www.gibbonslaw.com/biographies/attorney_biography.php?attorne...

1 of 5 9/3/2013 2:49 PM

Provided advice to design builder on issues related to P3 projects.

Assisted wind turbine manufacturer and supplier in the preparation of mastercontracts between manufacturer and private power developers. Also provided advicein connection with disputes including design and construction defects andperformance warranties for projects throughout the US.

Acted as construction contract and claims counsel for owner/developer of severalhydroelectric projects in upstate New York. Prepared and negotiated contracts withdesigners, contractors and major equipment suppliers. Provided advice on claimsand disputes that arose during construction and litigated extra work, delay andwarranty claims.

Represented design-builder of a power plant in a dispute with the supplier of two 315MW CFB Steam Generators. Primary issue was the use of 3D modeling in the designprocess. Other issues included design deliverable liquidated damages and concurrentdelays.

Arbitrator in a dispute between the Owner and Design Builder of a gas fired peakingplant. The design build contract value was in excess of $40 million and a separateturbine supply contract between the owner and turbine manufacturer wasapproximately $60 million. Issues included coordination between the design builderand the turbine supplier, delays, construction defects, manufacturing defects andperformance guarantees.

Arbitrator in a dispute involving a design-build contractor’s $30 Million claim againstan insurer under a policy providing coverage for certain payment obligations of theproject owner and a performance bond surety arising out of a landfill closure project.

Arbitrator in a dispute involving the sale of a construction company where the futurerevenue from a public construction project was the source of the funding for thepurchase price.

Arbitrator in a dispute arising out of contracts for roof systems on two officebuildings. Issues include statue of limitations, choice of law, limitations of liabilityprovisions and warranty claims, including a claim the warranty failed of its essentialpurpose.

Arbitrator in a dispute between contractor and subcontractor on several publichousing authority projects. Issues included the subcontractor’s claim that it was thegeneral’s joint venture partner, a project suspension by the owner and theapplication of the Eichleay formula for a home office overhead claim arising out ofthe suspension, and extra work claims.

Mediator in over 100 construction contract, construction defect, insurance and suretydisputes involving from two to over forty parties with claims ranging from thousandsto millions of dollars.

EducationSeton Hall University School of Law (J.D., 1980)

Monmouth University (B.A., 1976)

Brookdale Community College (A.A., 1972)

Professional AdmissionsState of New Jersey 1980

State of New York 1983


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United States District Court for the District of New Jersey 1980

United States District Court for the Eastern District of New York 1983

United States District Court for the Southern District of New York 1983

United States Supreme Court 1987

Professional ActivitiesFellow, American College of Construction Lawyers

Member, American Bar Association Forum on the Construction Industry Budget Chair, 2009-2010 Chair, 2008-2009 Chair-Elect, 2007-2008 Chair, Alternative CLE Committee, 2006-2007 Governing Committee, 2003-2006 Chair of Division 1, 2000-2002

Member, New Jersey Bar Association Dispute Resolution Section Chair 1994-1995 Construction and Public Contract Law Section

Original Member, Garibaldi ADR Inn of Court

Member, Committee on Complementary Dispute Resolution of the New JerseySupreme Court, Court Term 1994-1996

Mediator, Superior Court of the State of New Jersey 1994 to 2007

Mediator, United States District Court for the Southern District of New York

Member, Associated General Contractors of New York State

Member, Associated General Contractors of America

Former member, New York City Procurement Policy Board Advisory Council

Member of the Construction Cost Reduction Team appointed by Mayor MichaelBlumberg to study and report on New York City's capital construction program. Thereport was delivered in July 2008.

Construction Industry Arbitration and Mediation Panel, American ArbitrationAssociation

Publications"New York State’s Design Build Statute May Pave the Way for Public PrivatePartnerships," Business Litigation Alert, May 1, 2013 (Lisa Lombardo, Robert J.MacPherson)

"Got Those Supplier Ascertaining Allocation Blues?," RPE Law Alert, March 19, 2013(Philip W. Lamparello, Robert J. MacPherson)

"So Far Away from Home, It’s No Longer an American Tune: Fee Shifting inConstruction Disputes," JAMS Global Construction Solutions, Fall, 2012

"Contract Provisions - Who Reads Them Anyway," ABA Forum on the ConstructionIndustry, April 2012 (Robert J. MacPherson, Melissa Beutler, Patrick A. Genzler)


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"Shaking the Arbitration Blues," New Jersey Law Journal, March 28, 2011

"Mandatory Arbitration in Construction Payment Disputes," New York Law Journal,April 20, 2010 (Robert J. MacPherson, Neal M. Eiseman)

"Carefully Drafted Indemnification Clauses Provide Significant Protections toConstruction Contract Parties," New Jersey Law Journal, March 22, 2010 (Damian V.Santomauro, Robert J. MacPherson)

"The Devil Is In The Details When It Comes To Construction Contracts," ConstructionGroup Newsletter, January 29, 2010

"The Third Circuit Court of Appeals Decides Contracts Mean What They Say and theNo Harm No Foul Rule Still Applies," Construction Group Newsletter, July 2009

"Discovery Desk Book for Construction Disputes," ABA Publishing, 2005

"50 State Public Construction Law Source Book," CCH Incorporated, 2002

"Sticks and Bricks, A Practical Guide to Construction Technology," ABA Publishing,2001

"New York Construction Law Manual," West Publishing, 1998

"Partnering in Design and Construction - Alternative Dispute Resolution as aPartnering Tool," McGraw Hill, 1996

Quotes/InterviewsInterviewed in "Off the Clock," New Orleans CityBusiness, May 11, 2009

Speaking EngagementsSpeaker, Associated General Contractors of New York State , "P3: Potential, Profit orPitfall - What You Need to Know, " Saratoga Springs, NY. December 5, 2012

Mr. MacPherson has spoken before a variety of organizations, including the NewJersey Judicial College; American Bar Association; American Arbitration Association;New Jersey Institute of Continuing Legal Education; New Jersey Bar Association;Associated General Contractors of America; General Building Contractors of NewYork; Pratt University, New York, New York; Pace University, New York, New York;and Rutgers University, Newark, New Jersey.

Honors/Awards*Listed in Super Lawyers, Construction Litigation, 2011-2013

Listed in Chambers USA Guide to America's Leading Law Firms, Construction - 2006,2007, 2008; Litigation: General Commercial - 2013

Recipient, 2008 Chambers “Award of Excellence for Construction”

Listed in Best Lawyers in America, Construction Law and Litigation - Construction

James B. Boskey ADR Practitioner of the Year, 2001

NewsNew Jersey Super Lawyers and Rising Stars Ranks 69 Gibbons Attorneys as Leadersin Their Fields

*No aspect of this communication has been approved by the Supreme Court of NewJersey. Further information about methodologies for rating or selecting attorneys isavailable on our website’s Award Methodology page.


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Michael A. Marra American Arbitration Association

Vice President, Construction Division

As Vice President Construction Division, Mr. Marra’s responsibilities include managing the association’s largest commercial business. National responsibility includes managing and developing business with national construction associations with focus on selling dispute resolution services to the industry through placement in standard form contracts. As a division executive, he works directly with the senior vice president to develop marketing strategies and goals. His responsibilities also include developing and marketing national and regional education programs for both outside and in-house counsel/business professionals in an effort to educate the industry on AAA services and uncover leads for further development. On a regional basis, he prospects for and meets with potential clients to develop relationships and consults on dispute resolution strategy in an effort to increase revenue.

Prior to his appointment as District Vice President, Mr. Marra spent twelve years in the insurance industry in both operations and sales. Mr. Marra is a graduate of Temple University with a B.A. in Marketing.

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INTRODUCTIONAs General Counsel for Pavarini McGovern, Mr.Sciascia advises the CEO, Chairman and VicePresidents on various matters, which include newbusiness opportunities, deal structuring andcontractual risks, as well as working with ProjectExecutives and Project Managers to resolve tradecontractor negotiations and disputes. Mr. Sciasciareviews, negotiates and drafts constructionmanagement agreements with owners andsubcontract agreements with trade contractors.

Additionally, Mr. Sciascia is an adjunct professor atPolytechnic Institute of New York University, where heteaches graduate coursework in Construction Law andContracts & Specifications.

Mr. Sciascia is also the current Chair of the constructioncommittee of the New York County LawyersAssociation. He frequently lectures and moderatespanel discussions on topical issues effecting theconstruction industry.

EDUCATION• JD/Law/Fordham Law School• BS/Architecture/Arizona State University• MS/Construction - RE Development

Core/Arizona State University

BAR ASSOCIATIONS• New York State Bar/April 1998• US Supreme Court Bar/May 2005• NY County Lawyers Association/

Construction Law Committee - Chair

AWARDS• The Archibald R. Murray Public Service Award• Student Leadership Award - Habitat for

Humanity/Fordham University School of Law

MEMBERSHIPS• Board/Greater NY Construction User Council• Board/Arizona State University Alumni

Association/Greater New York Chapter• Member/Association of Corporate Counsel

DEVELOPMENT EXPERIENCESavoy Senior Housing Corporation, New York, NY General Counsel & VP of Real Estate DevelopmentDeveloped proforma models to analyze various realestate transactions including development budgets,construction costs, operational income and expenses,investor IRR, lease-up, draws, and refinancing.Designed, coordinated and carried out due diligencework plans to ascertain physical, legal and marketrisks. Responsible for preparing business plans andmarket analysis for presentation to equity and debtcapital sources. Acted as owner's representative andmanaged architects, engineers, and subcontractors ona variety of old and new projects.

Took over $15 million in construction to completeconstruction of two assisted living facilities (150,000-SF) after construction manager failed to timelycomplete and was terminated. Terminated deficienttrades. Bid and negotiated completion contracts.Directed all work including Owner's separate trades.Coordinated as-built drawings, expeditors and Dept.

J o e l M . S c i a s c i a , E s q . I G e n e ra l C o u n s e l

NEW YORK LAW SCHOOL FLAGSHIP BUILDING

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of Building inspections. Obtained Certificates of Occupancy. Worked witharchitects and engineers to design and specify a ground up 70,000-SF assistedliving facility, then worked with architects and engineers to redesign the siteas an apartment building. Oversaw outside counsel on over $17 million incivil litigation. Handled various legal matters, drafted and negotiated leases,obtained Dept. of Health licenses, as well as assisted in all aspects ofdevelopment, zoning, financing, leasing, due diligence, and market analysis.

REAL ESTATE EXPERIENCEErnst & Young Kenneth Leventhal, New York, NY Senior Consultant/AttorneyAdvised clients on various real estate issues. Structured and modeled realestate transactions and Real Estate Investment Trust (REIT) initial publicofferings using Excel software. Developed tax liability and OP unitallocation models for REIT roll-ups. Performed REIT acquisition andlending due diligence including lease and mortgage review; asset, incomeand distribution testing; and organizational requirement analysis. DevelopedREIT due diligence work plans, document requests and property servicequestionnaires. Researched and wrote briefs on various real estate tax issues.

Goldberg Weprin & Ustin, New York, NY Acquired extensive limited liability company law experience; draftingoperating agreements, partnership conversions, and conveyancing.Drafted commercial mortgages, notes, and assignments. Performed duediligence for commercial acquisitions. Represented commercial lendersand residential and commercial purchasers at closings. Handledforeclosure and construction litigation, DHCR, and tax remission issues.

Max E. Greenberg Trager Toplitz & Herbst, New York, NYClosed condominium and cooperative loans for institutional lenders.Researched and wrote briefs on construction issues. Corrected deficientloan packages and prepared closing binders.

PAVARINI MCGOVERN EXPERIENCEAcademia ProjectsNY Law School Flagship Building, 185 West Broadway, New York, NYColumbia University, Campbell Sports Center, New York, NY

Mixed-Use ProjectsSetai Fifth Avenue Hotel & Residences, 400 Fifth Ave., New York, NYCassaNY, 60-77 West 45th Street, New York, NYShangri-La NY, 610 Lexington Avenue, New York, NYThe Smyth Hotel, 85 West Broadway, New York, NY

Residential Projects40 East 66th Street, New York, NY45 Park Avenue, New York, NY47 East 91st Street, New York, NY57 Reade Street, New York, NY70 Bedford Street, New York, NY110+Broadway, New York, NY124 Hudson Street, New York, NY2forty, 240 Park Avenue South, New York, NYThe Anthem, 220 East 34th Street, New York, NYArcadia, 408 East 79th Street, New York, NYArtisan Lofts, 143 Reade Street, New York, NYBarbizon/63, 140 East 63rd Street, New York, NYThe Hubert, 3-9 Hubert Street, New York, NYK. Hov, Port Imperial North, West New York, NJMercer 40 Residences, 40 Mercer Street, New York, NYThe Pier Apartments, Jersey City, NJThe Urban Glass House, 330 Spring Street, New York, NY

Hospitality ProjectsThe East River Hotel, 410 East 92nd Street, New York, NYThe Standard, 848Washington Street, New York, NY

Commercial/Office Projects330 Hudson Street, New York, NY360 Madison Avenue, New York, NY505 Fifth Avenue, New York, NY579 Fifth Avenue, New York, NY580 Fifth Avenue, New York, NY598 Madison Avenue, New York, NY640 Fifth Avenue, New York, NYBank of America, 9 West 57th Street, New York, NYHarlem Park, 1800 Park Avenue, New York, NYLegal Aid Society, New York, NYWaterfront Corporate Center Phase II & Phase III, Hoboken, NJ

Retail Projects1 East 57th Street, New York, NYThe Belnord, 225 West 86th Street, New York, NY

Healthcare ProjectsKings County Hospital Center, DASNY, Brooklyn, NYNY Proton Center, New York, NY

Gov’t/Civic ProjectsQueens Family Court & City Agency Facility DASNY, Jamaica, NY

Cultural ProjeccsThe Battery SeaGlass Carousel, New York, NYFrench Embassy in US, New Y ork, NY

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