Contract Trumps Arbitration Provisions of General Business Law Article 35-E

On April 14, 2016, the Third Department issued a decision in Matter of Capital Siding & Construction, LLC (Alltek Energy Systems, Inc.), 2016 NY Slip Op. 02878, staying an arbitration and enforcing the dispute resolution terms of the parties' contract.

In Capital Siding & Construction, the parties "entered into a construction contract." When a dispute arose between them, the "respondent sought expedited arbitration pursuant to General Business Law article 35-E, also known as the Prompt Payment Act (hereinafter PPA)." The petitioner commenced a proceeding "to permanently stay the arbitration on the ground that" the contract provided "that litigation, not arbitration, [wa]s the parties' chosen method of dispute resolution." The trial court denied the motion, "interpreting the PPA to render the subcontract's dispute resolution provision void and unenforceable because it denies respondent the option to arbitrate the payment dispute." The Third Department reversed, staying the arbitration, explaining:

The PPA's stated purpose is to expedite payment of all monies owed to those who perform contracting services pursuant to private construction contracts exceeding a certain monetary threshold. As relevant here, that purpose is effectuated by General Business Law § 756-b(3)(c), which states that, if a contractor is accused of violating any of the PPA's provisions, an aggrieved subcontractor may refer the matter to the American Arbitration Association for an expedited arbitration. The PPA also states that, except as otherwise provided in this article, the terms and conditions of the parties' written agreement will supersede the PPA's provisions. However, General Business Law § 757(3) specifically directs that a provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that expedited arbitration as expressly provided for and in the manner established by General Business Law § 756-b is unavailable to one or both parties is void and unenforceable.

Here, petitioner contends that the PPA expressly provides that the subcontract's dispute resolution provision supersedes the PPA's requirement that expedited arbitration be available to an aggrieved party, and that it is unaffected by the "[e]xcept as otherwise provided" language of General Business Law § 756-a. Petitioner argues that the only exception to the PPA's general policy of giving primacy to the terms of a construction contract is found in General Business Law § 756-b(1), which provides for the accrual of interest on overdue payments notwithstanding any contrary agreement. Petitioner's reading of the PPA, however, ignores the existence of General Business Law § 757(3), which, as we have stated, unambiguously voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties. Contrary to petitioner's argument, the obvious function of section 6.2 of the subcontract is to establish litigation as the sole legal option for the resolution of disputes under the subcontract, which, in turn, denies both parties the opportunity to arbitrate such claims. Inasmuch as General Business Law § 757(3) clearly operates to void and render unenforceable the subcontract's dispute resolution provision, we find that Supreme Court properly denied petitioner's application to stay arbitration.

(Internal quotations and citations omitted).