Construction Payment Disputes

Nearly every construction dispute is a payment dispute wearing a different label. Defect allegations appear when a final payment is requested. Schedule complaints surface when retainage is due. Backcharges materialize at closeout. The contractor who understands the payment rules, and preserved the documentation, is in a much better position than the one arguing about workmanship two years later.

The Law Offices of Albert Goodwin represents contractors, subcontractors, and suppliers in New York City in payment claims, and owners and general contractors defending them.

New York's Prompt Payment Act

Article 35-E of the General Business Law regulates payment timing on private construction contracts above a threshold value, with exclusions including certain residential work on one-to-four-family dwellings and public work covered by other statutes. Its core provisions:

• Approval of invoices. An owner must approve or disapprove an invoice within twelve business days of receipt of the invoice and any required supporting documentation. Disapproval must be in writing and must state the reasons.
• Payment. Payment of approved amounts is due within thirty days after approval.
• Downstream payment. A contractor that receives payment must pay its subcontractors their proportionate share within seven days of receipt, and the same obligation flows down through the tiers.
• Interest. Late payments accrue interest at a statutory rate of one percent per month on the unpaid balance, unless the contract provides for a higher rate.
• Suspension. A contractor or subcontractor that has not been paid may, after written notice and the passage of the required period, suspend performance without penalty, which is a meaningful remedy that contractors are often unaware they have.
• Expedited arbitration. The Act provides an expedited arbitration mechanism for resolving disputed amounts, which can be considerably faster than litigation.
• Waiver. The Act's protections cannot be waived by contract, which matters because construction contracts routinely attempt to.

Invoking the Act, including the interest and the right to suspend, changes the dynamic of a payment negotiation and should be considered before a claim becomes a lawsuit.

Pay-If-Paid Clauses Are Void in New York

Many subcontracts state that the general contractor's obligation to pay is conditioned on the general contractor first receiving payment from the owner, making the subcontractor a co-venturer in the owner's credit risk. New York's Court of Appeals held that such a clause is void and unenforceable as against public policy, because it operates as a prohibited waiver of the subcontractor's Lien Law rights.

The distinction that survives is between a pay-if-paid condition, which is void, and a pay-when-paid provision that merely fixes a reasonable time for payment, which is enforceable as a timing term. Drafters attempt to write the former in the language of the latter, and how a clause is characterized is frequently the central question in a subcontractor's collection case. The Lien Law separately provides that an agreement to waive the right to file or enforce a lien is void as against public policy, which is the foundation of the rule.

Retainage

Retainage held on private projects is regulated. The Prompt Payment Act limits the amount that may be retained and requires that final payment of retainage be released within a defined period after final approval of the work. A contractor that has achieved substantial completion and delivered closeout documentation is entitled to release, and an owner withholding retainage over disputed punch list items must generally identify them rather than holding the entire sum indefinitely.

Retainage disputes usually resolve on documentation: the substantial completion date, the punch list as it existed and as it was completed, the closeout deliverables submitted, and the correspondence. Contractors who deliver closeout packages promptly and in writing, with a transmittal record, collect retainage far more reliably than those who do not.

General Contractor Liability for Subcontractor Wages

New York law makes a general contractor on most private construction projects jointly and severally liable for wages owed to employees of its subcontractors at any tier, including liquidated damages and attorney fees, subject to a look-back period. The general contractor may demand payroll records, certified payrolls, and related information from subcontractors, and a subcontractor's failure to provide them can be grounds to withhold payment.

The practical consequences are significant. General contractors should build the record demand into the subcontract, condition payment on receipt of certified payroll and wage compliance certifications, require indemnification, and consider bonding or insurance requirements for subcontractors whose payroll practices cannot be verified. Subcontractors should expect the demands and be prepared to satisfy them, since inability to produce payroll records is now a payment problem as well as a compliance one. See wage and hour claims.

Lien Waivers: Read Them Before You Sign

Lien waivers are exchanged routinely with progress payments and are frequently signed without review. The distinctions that matter:

• Conditional versus unconditional. A conditional waiver takes effect only upon actual receipt of the payment. An unconditional waiver takes effect on signing, whether or not the check clears.
• Partial versus final. A partial waiver should be limited to the amount actually received through a stated date.
• Scope creep. Many forms waive not only lien rights but all claims of any kind through the date, which extinguishes pending change order requests, delay claims, and impact claims that the contractor believes are still open.

The correction is straightforward: strike the general claim release, limit the waiver to lien rights for the amount received through the stated date, and reserve pending claims by identifying them expressly on the face of the waiver. A contractor who reserves claims in writing every month has preserved them. One who signs the form as presented usually has not.

Securing the Debt

A payment claim is worth what can be collected on it. The tools available in New York:

• Mechanics liens against the improved property, with filing deadlines measured from the last item of work, which differ for single-family dwellings and for public improvements. Deadlines are jurisdictional and cannot be extended by negotiation. See mechanics liens.
• Payment bond claims on bonded projects, including public work, with their own notice requirements and shorter deadlines that are easy to miss while a lien is being pursued.
• Lien Law Article 3-A trust claims, which reach the funds and the individuals who diverted them, and which survive a contractor's insolvency in ways an ordinary contract claim does not. See trust fund claims.
• Breach of contract and account stated claims against the contracting party.
• Unjust enrichment and quantum meruit against an owner with whom there is no contract, subject to significant limits where a contract governs the relationship, and unavailable to an unlicensed home improvement contractor. See licensing.
• Personal guaranties on supply and credit accounts, which frequently offer the fastest route to recovery. See guaranty enforcement.

Common Defenses You Should Expect

Owners and general contractors resisting payment typically assert defective or incomplete work, backcharges for another trade's corrective work, delay damages and liquidated damages offsetting the balance, failure to submit required documentation such as certified payrolls or closeout materials, unapproved change orders performed without written authorization, and failure to comply with the contract's notice provisions. Each of these is answerable, and each is answered with contemporaneous documentation rather than recollection: daily reports, photographs with dates, requests for information and the responses, meeting minutes, and the correspondence file.

If You Are the One Being Asked to Pay

We also represent owners, developers, and general contractors facing payment claims, where the work involves evaluating the claimed amounts against the contract and the actual work performed, asserting legitimate backcharges properly and on time, discharging overstated or untimely liens, invoking notice and documentation requirements, and resolving trust fund allegations that frequently accompany a subcontractor's claim.

You can contact us by phone at 212-233-1233 or by email at [email protected].