Prompt Payment Act's Arbitration Provisions Make Contract's Agreement to Litigate Disputes Covered by the Act Unenforceable

On January 30, 2019, Justice Ostrager of the New York County Commercial Division issued a decision in Dakota, Inc. v. Nicholson & Galloway, Inc., 2019 NY Slip Op. 30270(U), enforcing the Prompt Payment Act's provisions making agreements to resolve disputes by litigation rather than arbitration unenforceable, explaining:

Here, the plain language of the PPA makes void and unenforceable the parties' purported agreement to litigate disputes arising out of the Agreement to the extent the Agreement precludes the PPA's expedited arbitration procedure. The PPA provides that a provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that expedited arbitration as expressly provided for in the manner established by section 756-b of this article is unavailable to one or both parties is void and unenforceable.

The Third Department's decision in Matter of Capital Siding & Constr., LLC is particularly instructive. There, a construction contract dispute arose when a contractor withheld certain payments from a subcontractor. The subcontractor sought expedited arbitration pursuant to the PPA and the contractor commenced a CPLR § 7503 proceeding to stay the arbitration. Petitioner contractor argued that the agreement at issue expressly states that litigation, not arbitration, is the parties' chosen method of dispute resolution.

The Third Department held that petitioner's reading of the PPA ignores the existence of General Business Law § 757(3), which unambiguously voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties. Likewise, here, the parties' agreement to litigate, and not arbitrate, disputes is void and unenforceable to the extent it precludes N&G from properly invoking the PPA's expedited arbitration procedure.

(Internal quotations and citations omitted).

Commercial litigation involves more than courts. Disputes often are--usually by agreement but sometimes by statute--decided by private arbitrators. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a dispute that is subject to an arbitration agreement or law.