By: Stephanie Reed
Massachusetts Supreme Judicial Court (“SJC”) recently clarified certain aspects of the Prompt Payment Act, which requires parties on the receiving end of payment applications or change order requests to either approve or formally reject invoices within specified timeframes. In Business Interiors Floor Covering Business Trust v. Graycor Construction Company Inc., et al., the SJC reiterated that a party’s failure to timely take the required actions is a material breach that precludes its subsequent enforcement of the contract and waives otherwise available common law defenses. The court also offered a roadmap for obtaining preliminary injunctive relief in certain circumstances and did away with the availability of separate and final judgments.
The SJC’s long-awaited interpretation of the Prompt Payment Act brings to an end a nearly four-year odyssey through the state, federal, and appellate courts in Massachusetts. Project Owners, General Contractors, and Construction Managers should take note of this decision and put a plan in place to ensure compliance with the Act.
“Pay Now, Argue Later” Approach
A critical element of the Business Interiors ruling is the requirement that contractors who fail to follow the Act’s procedures for invoice approval or rejection pay the disputed amount before initiating a lawsuit. According to the SJC, this “pay now, argue later” approach ensures that subcontractors receive timely payments, with the possibility for the payor to recover the funds through disgorgement if it is later determined that payment was improper. The decision reinforces that if a party does not approve or reject an invoice pursuant to the Act, it must be ready to pay before filing suit or raising available defenses.
If a Project Owner, General Contractor, or Construction Manager rejects a payment requisition or change order request in whole or in part, the rejection must: (i) be in writing, (ii) state the factual or legal bases for the rejection, and (iii) contain a certification that the rejection was made in good faith. The written rejection must be made within 15 days (or 22 days in response to a subcontractor’s request) of the submission of the request in the first instance. If such a rejection is not made during this initial review period, it is “deemed approved” under the Act and payment must be made no later than 30 days or the time payment is due under the construction contract, whichever is shorter.
Preliminary Injunctions and Immediate Payment
Traditionally, financial damages do not meet the threshold for irreparable harm, one of the necessary elements for obtaining preliminary injunctive relief. However, Business Interiors recognizes that the Act creates an exception to this rule: contractors facing payment delays can seek immediate relief through a preliminary injunction to prevent financial insolvency and ensure operational continuity. The Court noted that prompt payment under the Act is essential to ensuring the financial stability of contractors, subcontractors, and sub-subcontractors, thus justifying a divergence from well-settled Massachusetts rule that injunctions are not available in purely monetary disputes.
Integrated Dispute Resolution
The Court clarified that disputes under the Act must be resolved within the broader context of the overall contractual litigation, rather than through separate and final judgments under Mass. R. Civ. P. 54(b). This ruling means that claims related to prompt payment must be integrated with other contract-related disputes, ensuring comprehensive resolution. This is a departure from prior Act-based jurisprudence that recognized the availability of separate and final judgments.
Business Interiors shows that Massachusetts courts continue to take compliance with the Prompt Payment Act seriously. All private construction project owners, and general contractors, construction managers, and subcontractors involved in the construction of non-residential construction projects – or residential construction projects with more than four dwelling units – valued at over $3,000,000.00 must ensure that they have a full and complete understanding of the Act in relation to the administration of the construction contract. Otherwise, they might spend years trying to recover payments made over perfectly valid objections.
If you have any questions about the Prompt Payment Act and want to discuss your rights and obligations under the Act, please reach out to Stephanie Reed, Kenneth Sherman, or any other members of Prince Lobel’s Construction Group.