Client Alert – Construction Law Update: Massachusetts Appeals Court Enforces the Massachusetts Prompt Pay Act, G.L. c. 149, § 29E

By: Anthony B. Fioravanti, Esq.

        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.  Although the Prompt Pay Act was enacted in 2010, this is the first appellate court opinion interpreting the Act and its requirements for rejections of pay applications.  The Appeals Court enforced the requirements of the Prompt Pay Act, including the requirement that an owner certify that a rejection, in whole or in part, was made in good faith.  The Appeals Court made clear that any payment application that is not rejected (1) on time; (2) with the factual and contractual basis for the rejection; and (3) with a certification as being made in good faith, will be deemed approved.  Owners and contractors should take note of this decision to ensure that their pay application procedures comply with the Act.

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” because an owner failed to respond; however, the owner still 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 sets the requirements for a proper rejection of a payment requisition. The owner must explain the factual and contractual basis for rejection and certify the decision as having been made in good faith.

Trial Court Proceedings

            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’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, 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 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.

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 adopted the reasoning of the Superior Court judge.  With respect to each of the seven payment applications at issue, the Appeals Court held that the owner “failed to issue a rejection effective under the Act prior to the date that payment was due” and that each application was therefore “deemed approved by operation of law . . . and became due and payable.”

The Appeals Court rejected the Owner’s argument that the statutory provision requiring an owner to certify any rejection “as made in good faith” is not “merely ministerial,” and is instead “an essential component of the scheme set up by the statute.”  The Appeals Court reasoned that on complex construction projects there is an enormous amount of communication between the owner and contractor, some of which relates to contractual compliance and some of which relates to payment.  As such, the certification requirement ensures that “the owner [will] be deliberate about rejecting applications for periodic payments, and that it takes care to reject them only in good faith.”  Moreover, the certification requirement also “provides a clear indication to the contractor that an application has been rejected, so that the contractor can know both that some response is needed and that time periods have been triggered for invoking what remedies are available.”  For these reasons, the Court enforced the statutory certification requirement as written.  The Appeals Court held that even where the Owner rejected a payment application on time and “arguably” provided the factual and contractual basis for the rejection, the application was nevertheless “deemed approved” for failure to include the required certification.

The Court also rejected the Owner’s argument that Tocci had breached the contract, and that the Owner therefore had good reason to reject the applications.  The Court found that Tocci’s alleged breach of contract may give rise to a counterclaim, but it did not provide the Owner a basis to withhold payment in contravention of the Prompt Pay Act.

Lastly, the Appeals Court affirmed the entry of separate and final judgment in favor of Tocci on its Prompt Pay Act claim.  In affirming separate and final judgment, the Appeals Court agreed with reasoning of the trial court.  Specifically, the Appeals Court held that “to allow [the owner] to retain moneys wrongfully withheld in violation of the statute until final resolution of their postcompletion contract action would eviscerate the scheme for prompt payment or rejection-and-resolution created by the Legislature.”  The Appeals Court added that because the owner did not comply with the Prompt Pay Act requirements, it “must pay what is due, even though [its] claims against [Tocci] have not yet been fully resolved.”

Summary

        This case is one of the first decisions addressing the substantive requirements of the Prompt Pay Act by a Massachusetts appellate court.  In enforcing the requirements of the Act, the Appeals Court has provided 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.  Owners and contractors should review their policies and procedures for processing pay applications to ensure that they are comply with the Prompt Pay Act’s requirements.

[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 . . . .”

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