On June 7, 2022, the Massachusetts Appeals Court issued the first appellate decision interpreting the Massachusetts Prompt Payment Act, G. L. c. 149, § 29E. Enacted in 2010, the Prompt Payment Act (the “Act”) is intended to ensure that construction project owners, general contractors, and subcontractors either promptly pay contractors or subcontractors during construction work, or quickly resolve any dispute about requisitions for payment. The decision reinforces that the requirements of the statute are to be strictly construed, while at the same time preserving the payor’s legal and contractual rights to withhold or claw-back payment.
In Tocci Building Corp. v. IRIV Partners, LLC, the contract between the general contractor and owner contained standard industry terms concerning the submission and payment of applications for payment. Under the contract, applications were to be submitted monthly with payment due no later than 30 days after a complete and accurate payment application had been received.
At issue in the case were seven applications for payment issued by the general contractor to the owner. The owner’s responses to the applications were varied. For example, when the owner did respond, the responses did not include a factual or contractual basis for non-payment or withholding of payment. Instead, the owner requested backup for certain costs billed, provided the general contractor with a list of alleged deficient items, and declared it in default.
The general contractor sued the owner for breach of contract, alleging violation of the Act. The Act requires every contract for construction to “provide reasonable time periods within which: (i) a person seeking payment under the contract shall submit written applications for periodic progress payments; (ii) the person receiving the application shall approve or reject the application, whether in whole or in part; and (iii) the person approving the application shall pay the amount approved.” Under the Act, payment applications are to be submitted on a cycle of no more than 30 days, which then must be approved or rejected within 15 days of submission, a period of time that is extended by 7 days for each tier below the prime contractor.
Importantly, under the Act, any rejection, whether in full or in part, must be (i) made in writing, (ii) must explain both the factual and contractual basis for the rejection, and (iii) must include a certification that the rejection is made in good faith. If no such rejection occurs, the invoice is “deemed to be approved” and payment must be made within 45 days thereafter. However, in the event a written rejection that complies with the Act is issued within 45 days after an invoice is “deemed to be approved,” the deemed approval is reversed, in effect allowing a party to properly reject an application within 60 days of submission.
In Tocci, none of the owner’s responses amounted to an effective rejection under the Act because they did not contain the factual or contractual basis for non-payment, and never included a certification that the rejection of the payment application was made in good faith. The Appeals Court noted that under the Act, unless a rejection in compliance with the Act is made within 30 days, the general contractor’s application for payment is “deemed approved” by operation of law and must be paid. Accordingly, the Appeals Court upheld the Superior Court’s grant of partial summary judgment for a general contractor, holding that the owner had wrongfully withheld payment under the Act and in breach of the parties’ contract. The Appeals Court further upheld the Superior Court’s decision to issue separate and final judgment on the claims concerning the unpaid payment requisitions.
The Appeals Court also addressed a surprising holding from the lower court’s decision: that the owner had waived its own claims for breach of contract against the general contractor as a result of its violation of the Act. The Appeals Court held that no such waiver had occurred and that the owner was still entitled to any claim it had against the general contractor for breach of contract to claw-back any money it may be owed under the parties’ contract.
The Tocci decision will reinforce the mandatory requirements of the Act as it concerns the submission, review, and payment of payment applications and change order requests. The decision makes clear that all requirements of the Act are to be strictly construed to comply with the core requirement of the statute: the prohibition of withholding payment without issuing a timely rejection in accordance with the requirements of the Act.
However, the decision also makes clear that just because a party may not comply with the Act, any contractual bases to seek recoupment of monies that must be paid under the statute as part of a breach of contract claim are not waived and can still be asserted, even though it may be cumbersome for an owner or general contractor to pay money over to a contractor or subcontractor only to then turn around and seek recoupment of it in litigation. In order to avoid such a situation, construction project owners, general contractors, construction managers, and others should continue to pay very close attention to the Act’s many requirements.
If you have questions, please contact one of the authors of this Client Alert, Chris Miller ([email protected]; 617-456-8083) or Ken Sherman ([email protected]; 617-456-8094).