June 22, 2022 - MA Appeals Court: Contractor's Pay Applications Deemed Approved for Owner's Failure to Comply with Prompt Pay Law
The Massachusetts Appeals Court has interpreted for the first time the Massachusetts Prompt Payment Act (the “Prompt Pay Law”) in the matter of Tocci Building Corporation v. IRIV Partners, LLC, et al., Nos. 21-P-393 & 21-P-733 (June 7, 2022). In its written opinion, the Appeals Court (Rubin, J.) affirmed a Superior Court summary judgment decision that held that the construction project’s owner, IRIV Partners, LLC (“Owner”), did not properly and timely reject the Tocci Building Corporation’s (“Tocci”) applications for payment and, therefore, the applications were deemed approved. We reported on that decision here. The Appeals Court also noted that the Owner can still pursue its offset claims but, first and foremost, it must pay those disputed but “deemed approved” applications for payment (less retainage) which totaled approximately $4.6 million dollars.
The Prompt Pay Law was enacted in 2010 to ensure the prompt payment, or resolution of disputes about, invoices for periodic payment made by contractors and subcontractors during the course of work on certain private construction projects.1 Tocci at 2. The Prompt Pay Law sets forth specific direction as to the timelines for submission and approval of pay applications and change order requests. See M.G.L. c. 149 § 29E(a). Specifically, a project owner must approve or reject a contractor’s application for payment fifteen (15) days after submission and must make payment within forty-five (45) days after approval. G.L. c. 149 § 29E(c). Any pay application that is “neither approved nor rejected within the [time provided by the Prompt Pay Law] shall be deemed to be approved unless it is rejected before the payment is due.” Id. Importantly, any rejection of an application must (1) be in writing; (2) include the factual and contractual basis for the rejection; and (3) be certified in good faith. Id.
Here, Tocci contracted with the Owner for work to be done at a project on Summer Street in Boston. The parties’ contract provided certain terms concerning the submission and payment of applications for periodic progress payments which were different than those of the Prompt Pay Law. Tocci submitted seven (7) applications for periodic progress payments to the Owner which remained unpaid after the project was completed. The Appeals Court examined each of the applications for periodic progress payments and the associated correspondence between Tocci and the Owner and concluded that, because the Owner failed to issue a rejection with respect to the seven applications at issue in compliance with the requirements of the Prompt Pay Law, each application was deemed approved. By way of example, in response to one of Tocci’s payment applications, the Owner responded via email and requested from Tocci, among other things, back up for a list of items, a complete accounting for Tocci employees’ time on the project, and copies of meeting minutes. The Court held that the email was vague, it failed to include a factual or contractual basis for the rejection, and it did not include a certification that the rejection was made in good faith. Accordingly, the application was deemed approved.
The Appeals Court decision is an unambiguous appraisal of the importance of strict compliance with each aspect of the Prompt Pay Law. In this case, although the parties’ contract was fully negotiated, this decision underscores the importance of the statutory requirements that the Owner provide the requisite written explanation for a rejection, certify each rejection is made in good faith, and make each rejection timely and in compliance with those deadlines prescribed by the Prompt Pay Law. Further, the Appeals Court’s affirmation of the award of the full amount of each application for payment (less retainage) plus interest makes clear that a party’s failure to adhere to the mandatory requirements of the Prompt Pay Law will be met with significant consequences.
It is important to note that the Owner does still have its right to offset. Although the Prompt Paw Law prohibits the withholding of periodic progress payments in response to an application without issuing a timely and proper rejection, the Owner may still bring claims or counterclaims in order to recover any money it may be owed, for example for defective work or delays to the project schedule. However, the Appeals Court rejected the Owner’s argument that a separate and final judgment should not have entered for Tocci because the Owner’s own claims against Tocci were not yet resolved. The Appeals Court concluded that waiting for final resolution of all claims did not override the requirements and purpose of the Prompt Pay Law and therefore must be pursued separately. Here, where the Owner failed to timely and properly reject the pay applications, the Appeals Court held it first had to pay what was due.
Although it is the first of its kind, the Appeals Court’s analysis of the Prompt Pay Law leaves us with a clear understanding that pay applications and change orders will be automatically approved if not rejected in accordance with the Prompt Pay Law timelines and process. The Prompt Pay Law applies not just to owners, but also to general contractors and down the line and, therefore, the lower tiers must also be diligent and comply with these requirements. Construction industry professionals should ensure that their teams are knowledgeable of the Prompt Pay Law and the Retainage Law2 and have implemented processes to ensure compliance. The Tocci decision reminds us that preventative medicine is often best, and training on the Prompt Pay and Retainage Law and engagement of legal counsel to advise on compliance will help owners administer a project in line with the Prompt Pay and Retainage Law to avoid the automatic approval of pay applications and change orders.
1 The Prompt Pay Law applies to private construction projects with a prime contract original value of three million dollars or more. For the Prompt Pay Law to apply in a residential context, the project must also have four or more units. See M.G.L. c. 149 § 29E(a).
2 Prompt Pay’s “sister law”, the Retainage Law, limits the amount of retainage that can be withheld on a construction project to five percent and establishes procedures at the end of a project for (a) timely identification of punchlist work, deliverables and claims; (b) determining the date of substantial completion; and (c) payment of retainage. See M.G.L. c. 149 § 29F.
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