Construction contract act poses challenges for owners, contractors

All New York construction contracts entered into on or subsequent to Jan. 13, 2003 will be subject to the provisions of the Construction Contracts Act of 2002. The Construction Contracts Act was signed into law by Governor Pataki on July 18, 2002 after considerable lobbying by the construction trades.

The act applies to private sector commercial projects contracted for over $250,000 and is not applicable to: construction contracts for one-, two- or three-family houses or residential tract developments of 150 units or less; residential construction projects if the aggregate size is 9,000 SF or less, or HUD-assisted residential projects having fewer than 150 units. Finally, the act is not applicable to construction undertaken "in" and "around" the former World Trade Center, although specific boundaries are not established.

Although the act establishes requirements for the payment of contractors, subcontractors and materialmen, parties are free to vary payment obligations in a formal construction contract; although certain provisions are deemed void by the act and may not be varied by contract.

The act provides that a contractor is entitled to invoice an owner for monthly payment requisitions and, upon delivery of an invoice and all contractually required documentation, the owner is required to approve or disapprove the requisition within 12 business days.

The act further requires that payment of a contractor's invoice shall be due from the owner not later than 30 days after approval of the invoice. However, if payment. by the owner is contingent upon the approval of a construction lender, payment will be due within 7 days after receipt by the owner of the corresponding loan proceeds.

Similar payment and withholding requirements are applicable a to contractor's approval or disapproval and payment of a subcontractor's or materialman's invoice.

If any progress or final payment is delayed beyond the due dates established by the act, interest is required to be paid on the overdue payment at the rate of 1% per month or at a higher rate consistent with the construction contract. Also, if an owner or contractor fails to approve or disapprove an invoice within the time period set forth in the act, or fails to pay the undisputed invoice amount within the time limits provided in the act, the contractor or subcontractor may suspend its performance after first providing the owner with not less than ten day's written notice.

The act specifically provides that certain contractual provisions will be void. Thus:

(i) a choice of law provision that makes the construction contract subject to the laws of another state; or that requires any litigation or arbitration arising from a contract to be conducted in another state is void (although materialmen are exempt from this requirement); and

(ii) a provision stating that a party cannot suspend performance if another party to the contract fails to make prompt payments, is void.

At first glance, one may conclude that the impact of the Act will be insignificant because most owners and construction professionals enter into contracts on generally recognized forms which provide for detailed payment terms and conditions. These forms will supersede the corresponding provisions of the act. Concern should be taken, however, in those instances where substantial commercial work is undertaken under a letter agreement or notice to proceed; or where work is undertaken pursuant to a contract or purchase order that may provide vague or incomplete payment provisions. In these cases, the Act will operate as a "gap filler" to complete the terms and conditions of the contract. Relatedly, greater emphasis will need to be placed on coordinating the upstream and downstream provisions of construction contracts in order to avoid inconsistencies.

The act will also require nontraditional "owners" and "contractors" such as tenants undertaking interiors work on their own behalf or on behalf of a subtenant; landlords performing work for tenants under a lease, and other parties, to be sensitive to payment and performance provisions in their contracts because work letters or tenant improvement allowance provisions in leases may be deemed to be "construction contracts" for purposes of the act.

Finally, the "mandatory" provisions of the act give one cause for concern.

The first of these provisions, consisting of the voiding of contract clauses that prohibit a contractor's right to suspend performance if prompt payment is not made, is noteworthy. Many aggressively owner-biased forms severely limit a contractor's right to suspend performance pending the resolution of a dispute relating to payment for work performed. These provisions may arguably be overridden by the provisions of the act

The mandatory choice of New York law and New York as a forum is equally problematic. Presumably, New York's choice of law rules may allow the application of another jurisdiction's substantive law where appropriate; although it is unclear if this is what was intended. Certainly, it will raise issues for cross-border (e.g. U.S. - Canadian) and multi-jurisdictional (e.g. NY-NJ) agreements since the act is not, by its terms, limited to projects which are physically located in New York State.

By its enactment of the Construction Contracts Act of 2002, the New York State legislature has taken a significant first step towards the establishment of a framework for the performance of private construction. From this date forward greater sensitivity to contract payment and performance terms will be required.

COPYRIGHT 2003 Hagedorn Publication
COPYRIGHT 2003 Gale Group