Micro-Link sued the Town for non-payment under a contract for services to manage a wastewater treatment plant. The Town moved to dismiss the suit on the grounds that Micro-Link failed to give notice of its claim within 6 months or commence suit within 18 months of the accrual date as required by Town Law Section 65(3). The Town’s motion was granted in part and denied it in part by the trial court.

On appeal by both parties the appellate court first held that the correct standard to determine the accrual dates for compliance with Town Law 65(3) was when Micro-Link’s claim was actually or constructively rejected stating: “Where a cause of action seeks to compel payment for work, labor and services rendered under a contract, the cause of action accrues when the claim is actually or constructively rejected.”

Since there was no actual rejection of Micro-Link’s claim, the question was the date when or whether is was constructively rejected.

As to Micro-Link’s first category of claims, it alleged that the Town did not explicitly reject those claims and agreed to arbitrate them with the Town Comptroller.

As to the second and third category of claims the court held the Town’s withholding payment and passing a resolution to hire an accountant to determine if there had been an overpayment did not Place Micro-Link on notice that its claim had been rejected. Also, a second resolution prohibiting payment until the Town board made a final decision was held not to constitute rejection of payment for the purposes of Section 65(3).

It is clear from the holding of this case that the the accrual date under Town Law 65(3) for the submitting a notice of claim or filing suit does not occur until there has been a final rejection of a claim by the Town.

The court’s holding that final rejection and accrual date for the second and third categories of claims had not taken place is easily understandable based on the statement in the Town’s resolution that it had not yet made a “final decision.”

The court’s holding that final rejection and accrual date for the first category of claims had not taken place is not so easily understood. Here the parties had reached an impasse and had to have the Comptroller arbitrate their dispute. Therefore it seems reasonable to conclude that the Town had made and communicated its “final decision” to reject the first category of claims. Otherwise the dispute would not have been submitted by the parties to an alternate dispute resolution (ADR).

The Court of Appeals held in Windsor Sheet Metal that submitting a dispute to arbitration, also an ADR, did not toll or extend the accrual date for filing suit under State Finance Law Section 137. Therefore the court’s ruling in this case, that submitting a dispute to an ADR tolls the accrual date for notice and suit under Town Law 65(3), does not appear to be correct.

The consequence of this decision is that Towns would never use an ADR because, if this case is correct, resort to an ADR results in a waiver of a Town’s notice and suit defenses under Section 65(3). This would also be inconsistent with the public policy in NY which favors the use of ADRs.