In a recent decision, the Massachusetts Superior Court awarded a $4,000,000 judgment to a general contractor for breach of contract where the project owner failed to strictly adhere to the requirements of the Massachusetts Prompt Pay Act, G.L. c. 149, § 29E in response to the contractor’s payment requisitions. Although the Prompt Pay Act was enacted in 2010, there is very little case law in Massachusetts interpreting the Act and its requirements for pay application rejections. Although the decision is not binding on other courts because it was issued by a trial court judge, it could have significant implications for owners, general contractors, and subs involved in payment disputes on major construction projects in Massachusetts.
Background on the Massachusetts Prompt Pay Act
The Prompt Pay Act applies to private construction projects in Massachusetts where the general contract value exceeds $3,000,000 and where the contract was executed on or after November 8, 2010. The Act applies to any party who would be entitled to a mechanic’s lien (that is, prime contractors and first and second tier subcontactors). Notably, the Act does not apply to public construction projects or residential construction projects of fewer than four units (or other private projects where the original general contract value is less than $3,000,000).
Where the Act applies, it imposes strict timelines to respond to payment applications. For general contractors, the owner must approve or reject the GC’s application, either in whole or in part, within 15 days of submission, in writing.[1]
Additionally, where an owner rejects an application (in whole or in part), it must provide a written explanation of the factual and contractual bases for the rejection and certify that the rejection was made in good faith. If the owner does not respond to the application within 15 days of submission, the application is “deemed approved.”
The Act also imposes strict timelines on payment after an application is approved or “deemed approved.” An owner must pay approved, partially approved (and deemed approved) applications within 45 days of the approval. Where an application is “deemed approved,” however, because an owner failed to respond, the owner has an opportunity to properly reject a payment application before the payment due date. This is often referred to as the ‘clawback’ period because the owner can ‘clawback’ the approval it allowed to occur by not properly rejecting the payment request during the initial period. Accordingly, though a payment requisition is deemed approved initially if not rejected within fifteen (15) days, the Owner has a total of sixty (60) days to properly reject the requisition because of this clawback period.
Additionally, the Act provides for the manner in which a requisition is to be rejected. The Owner is supposed to explain the factual and contractual basis for rejection, and certify the decision as having been made in good faith.
Tocci Building Corp. v. IRIV Partners, LLC
Tocci Building Corp. v. IRIV Partners, LLC, et al., involved a construction project on Summer Street in Boston to which the Prompt Pay Act applied. Tocci was the general contractor and brought suit against the project owner, Boston Harbor Industrial Development, and the entity it appointed to oversee construction, IRIV Partners (together the “Owner”), for breach of contract and other claims.
Tocci’s breach of contract claim arose out of the Owner’s non-payment, in whole or in part, of seven separate payment applications. In some instances, the Owner responded to the submissions on a timely basis but failed to include the factual and contractual bases for the rejections. In other instances, the Owner failed to respond within the 15-day period and, if it did respond thereafter, it again failed to include the factual and contractual bases for the rejections. At no time did the Owner certify that its rejections were made in good faith. Instead, the Owner sent emails and a letter with some commentary (requesting “back up,” for instance).
Tocci filed a partial motion for summary judgment, arguing that the Owner failed to properly reject its payment applications pursuant to the Prompt Pay Act. Tocci asserted that the Prompt Pay Act was incorporated into the general contract and that the Owner’s conduct violated the Prompt Pay Act in breach of the contract.
The Superior Court agreed with Tocci. First, the Court found that the Prompt Pay Act supplemented the contract and trumped any conflicting contractual provisions. Second, the Court found that the emails and letter responsive to pay applications failed to comply with the Prompt Pay Act because they did not include an explanation of the factual and contractual bases for the rejections, and did not include a certification that the rejections were made in good faith. The Court explicitly rejected the Owner’s argument that these were “merely technical errors.” Additionally, the Court rejected the Owner’s argument that Tocci waived the Prompt Pay Act’s requirements by not requesting certifications.
Perhaps most importantly, the Court found that the Owner waived any contractual defenses it may have had to the applications by failing to respond to them in compliance with the Prompt Pay Act. Specifically, the Court said that the Owner “was free to raise any factual or contractual basis for rejecting the [r]equisitions in whole or in part, but failed to do so in compliance with the [Prompt Pay Act]. Because that is so, whatever objections [the Owner] may have had under the [c]ontract to the requisitions were waived.”
Having found that the Owner breached the contract by failing to comply with the Prompt Pay Act and that it thereby waived any defenses it may have had, the Court ruled that Tocci was entitled to payment of $4,600,109.24 for applications not properly rejected.
Finally, although there were other claims involved in the lawsuit, including counterclaims by the Owner against Tocci, the Court took the extraordinary step of entering final judgment in Tocci’s favor on the breach of contract claim. The Court found that “the Act directs that prompt payment be made” and that judgment should enter immediately “to comport with the Legislature’s will.” The Owner now continues with its counterclaim in the Superior Court while appealing the summary judgment granted against it at the Appeals Court.
Summary
This case is one of the first decisions addressing the requirements of the Prompt Pay Act by a Massachusetts Court, and this judge read and applied the language of the Act strictly. The decision, while not binding on other judges, will be used by generals and subs to argue that non-compliance with the Act means payment applications will be deemed accepted.
It will be interesting to see how the Massachusetts appellate courts handle it, and whether other Superior Court judges agree with the Tocci court in the meantime.
[1] The Act, G.L. c. 149, § 29E(c), extends the time period for sub and sub-subs as follows: “the time period, as applicable to approval or rejection by the person at each tier of contract below the owner of the project, may be extended by 7 days more than the time period applicable to the person at the tier of contract above the person . . . .”