As we reported last month, the Massachusetts Appeals Court recently affirmed a trial court’s decision that construed the requirements of the Massachusetts Prompt Pay Act, G.L. c. 149, § 29E. That decision was the first appellate court opinion interpreting the Act and its requirements for rejections of pay applications.
Then, on June 24, 2022, the Appeals Court issued a somewhat rare clarification of its decision. In its updated decision, the Appeals Court clarified that it was not deciding whether an owner who fails to comply with the Prompt Pay Act may assert counterclaims against the general contractor for alleged defective workmanship. As a result, it remains an open question whether an owner that fails to comply with the Prompt Pay Act in response to pay applications waives any factual or contractual defenses to payment for the work reflected in those pay applications.
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 sued 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 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, finding that (1) the Prompt Pay Act supplemented the contract and trumped any conflicting contractual provisions, (2) 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 (3) the “rejections” did not include a certification that they were made in good faith. Having found that the Owner breached the contract by failing to comply with the Prompt Pay Act, the Court ruled that Tocci was entitled to payment of $4,600,109.24 for applications not properly rejected and entered judgment in Tocci’s favor.
In its lengthy decision, the Superior Court also 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.” That is, the Superior Court seemed to decide that the Owner waived any counterclaims or other defenses it had with respect to the requisitions by failing to comply with Prompt Pay Act.
Appeals Court Opinion
In its opinion issued June 7, 2022, the Massachusetts Appeals Court affirmed the judgment of the Superior Court in its entirety and essentially adopted the reasoning of the Superior Court judge. Although the Appeals Court affirmed the judgment of the Superior Court, it did not directly address the portion of the Superior Court decision regarding the Owner’s potential waiver of counterclaims or contractual defenses. Instead, the Appeals Court appeared to say that an owner who fails to comply with the Prompt Pay Act may nevertheless recoup money it may be owed by asserting a counterclaim against the general contractor for breach of contract. Specifically, the Appeals Court stated “[The Owner] may bring, and indeed, in their counterclaims apparently have brought, any and all claims they may have for breach of contract against Tocci, and they may recoup any money they may be owed.” In this sentence, the Appeals Court appeared to disagree with the Superior Court’s analysis that the Owner had waived contract defenses by failing to comply with the Prompt Pay Act.
Appeals Court Clarification
On June 24, 2022, the Appeals Court issued a clarification modifying its prior decision. In its modification of its opinion, the Appeals Court left open the possibility that an owner who fails to comply with the Prompt Pay Act may waive contractual defenses to payment.
The Appeals Court removed this sentence in its entirety: [The Owner] may bring, and indeed, in their counterclaims apparently have brought, any and all claims they may have for breach of contract against Tocci, and they may recoup any money they may be owed.” In place of this sentence, the Appeals Court inserted the following: “A party that under the statute makes a periodic payment in response to an application, rather than rejecting it, may nonetheless bring any and all claims it has for breach of contract against the payee and may recoup any money it may be owed.”
Through this change, the Appeals Court suggests that an owner who complies with the Prompt Pay Act may later seek recoupment of money it may be owed, but is silent with respect to owners, like the owner in the Tocci case, that do not comply with the Prompt Pay Act. Additionally, the Appeals Court added a footnote stating, “In their counterclaims the defendants have apparently brought claims for breach of contract against Tocci. We express no opinion on the merits of those counterclaims or any defenses thereto.” This clarification leaves open the possibility that the Owner waived its contractual defenses to payment as stated in the original Superior Court decision.
The Tocci case provides clear guidance to all parties involved in large construction projects regarding how payment applications are to be timely processed and, if not properly rejected, timely paid. In the event of non-compliance, the courts will enforce the Prompt Pay Act and order that payment to be made. Beyond that, through its modification of its decision, the Appeals Court left open the question of whether an owner who fails to comply with Prompt Pay Act is deemed to have waived contractual defenses to payment to recoup amounts it is required to pay. Given the uncertainty on the effects of non-compliance, owners, general contractors and subcontractors should ensure that their policies and procedures are consistent with the Act.
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