Recorded on July 12, 2022
Hi. My name is Jim Peloquin. Welcome to Conn Kavanaugh’s webinar on recent developments in Massachusetts construction law. I will be your host. I am the chairperson of our construction law and litigation group. I am here with some of my colleagues in that group to discuss with you a very significant recent development involving what is commonly referred to as the Massachusetts Prompt Pay Act.
This is a statute that’s been on the books in Massachusetts for about a dozen years. It was intended to improve the timeliness in the manner in which contractors at all level, at all levels can get paid for work that they have properly performed. But until recently, it frankly had not been the subject of any significant appellate case law until the decision that brings us here today, which is called Tocci Building Corporation versus IRIV Partners, a decision by the Massachusetts Appellate Court.
So without further ado, I’m going to introduce you to each of the members of our crackerjack team, and we will break this down for you in short order. I’m going to start with Dayana Donisca. Dayana is a 2021 graduate from Suffolk Law School, and she is going to speak to how the Prompt Pay Act comes into play on what types of projects and how the process is initiated.
Without further ado, Dayana
Thanks, Jim. So the goal of the Prompt Pay Act or the PPA is to get contractors paid for the services and work that they provide. The Act imposes a mandatory requirement that basically encourages prompt review and payment of periodic payment requisitions submitted by contractors on all private projects, construction projects worth more than 3 million, except for those projects that contain four or less dwelling units.
That is, that the prime contract itself must be worth 3 million. A subcontract does not need to be worth 3 million, just that main project. The PPA requires first that the time period for each application or a periodic progress payment not exceed 30 days for submission. The 30 day rule allows the contractor to submit every 30 days, starting with the end of the first calendar month, at least 14 days after performance starts.
Note that section C is dealing with that periodic payment. Section D has a similar rule and time parameters for seeking an increase in the contract price, i.e. change orders. The Tocci case involves those periodic payments. The second requirement of the PPA is that approval or rejection be given at least 15 days after submission. Keep in mind that the time period to approve or reject these payment applications is extended by an additional seven days or more, seven days more, excuse me, for the person at each tier of the contract below the owner of the project.
And the third requirement of the PPA is that payment be due 45 days after the payment application is approved.
Thank you, Dayana. Needless to say, with the $3 million threshold, that’s pretty easy to meet in these times. Particularly with inflation. So this is going to really come into play on virtually all significant construction projects and next, I want to turn to Nicole Levesque. Nicole joined us about a year ago after starting her career in the Chicago area.
Where she had gone to the Loyola University Chicago Law School, graduating in 2017. She had clerked at the Illinois Appellate Court spent some time in private practice there, and then joined our team just about a year ago. Nicole is going to speak to what someone in this realm needs to do when they’re presented with one of these payment applications or a request for a change or to increase.
So I turn it over to you Nicole.
Thanks, Jim. So now that we’ve discussed when paychecks have to be submitted and paid, we need to consider what might happen when there are reasons perhaps not to pay a submitted requisition. And first, it’s important to note that an application for periodic progress payment that is not approved or rejected within the time required by The Act is deemed approved unless it’s properly rejected before a payment is due.
Therefore, it’s critically important for parties subject to The Act to strictly comply with The ACT requirements for rejecting incomplete or otherwise defective pay requisition. And there are three steps that a party must take to properly reject pay requisition under The Act. And each step can be easily remembered using a mnemonic device “We Reject Correctly” or the acronym WRC, and we’ll break that down. So first, in order to be considered a proper rejection under the Act, the rejection must be W – in writing.
Second, R – reason, it must include the factual contractual basis upon which the contractor or owner is relying on to reject the pay requisition and finally, C – certification. It must include a certificate of good faith indicating exactly that, that the owner, a contractor is rejecting the pay requisition in good faith. And as you’ll hear from Chris in a moment, as is critical in the Tocci case, if a purported rejection fails to include any element of that WRC trifecta,
it’s not a proper rejection under The Act and may result in the approval of an otherwise defective requisition. And with that, I’ll turn it back to you, Jim.
Thank you, Nicole. I’ll point out, having reread the statute this morning, that the writing portion of what Nicole just described can be an electronic writing. So it can be email, which is not surprising in this day and age. Last but not least, I’m going to turn this over to my partner Chris Sweeney. Chris is a 2012 Suffolk Law School graduate, summa cum laude.
He has been with us for the past ten years in practice in the construction law group. And Chris is going to pull this all together by telling our audience what actually went down in the Tocci case that is so significant for the practitioner or for the construction industry players to know. So I turn it to you, Chris.
Thanks, Jim. Yes. Last month, the appeals court for the first time applied the principles that Nicole and Dayana just discussed regarding the Prompt Pay Act and the case between Tocci Building Corporation and IRIV Partners, LLC. The case essentially arose out of a building project construction of a major building in Seaport Boulevard in Boston. And essentially over the course of a few months in 2018, Tocci, who is the project’s general contractor, submitted a series of seven pay requisitions to IRIV the project’s owner, and the owner declined to pay each of those pay requisitions, at least in full.
And his responses essentially took one of three forms. First, in some cases, the owner simply failed to respond to the pay requisition at all. Didn’t respond in writing with with any reasons for rejecting the pay requisition. It didn’t make a payment. It simply ignored the requisition and moved on. As to several other pay requisitions, the owner sent what amounted to a perfunctory email response, providing a very limited explanation for the basis for the rejection and otherwise failing to include the required certificate of good faith.
And then finally, as the project became increasingly contentious between Tocci the owner Tocci got a, or the owner got a lawyer involved and the lawyer sent a series of letters providing some additional detail as to the basis for the reason the owner was rejecting certain pay requisitions and also referencing provisions of the contract that supported the rejection.
But again, those letters failed to include the required certificate in good faith. And so at the end of the project, Tocci filed a lawsuit against the owner seeking to recover all amounts that were withheld under those pay requisitions. And the trial court agreed with Tocci and enter a judgment in its favor, ordering the owner to pay over all those disputed amounts to Tocci. The owner
then appealed to the appeals court, and the appeals court affirmed the trial court’s judgment, meaning it agreed with the trial court and affirmed the order in favor of Tocci and the appeals court. The reasoning, essentially, was that the Prompt Pay Act means exactly what it says. That is, an owner is required to promptly accept or reject pay requisitions and if the owner chooses to reject a pay requisition in whole or in part at its core, it’s got to state the contractual and factual basis for doing so.
And it’s got to include that required certificate of good faith. So applying these standards, the court rules that none of the seven disputed responses were acceptable for obvious reasons of failure to respond at all is not going to pass muster under The Act. Short and vague email response is not going to be any better under The Act because it’s probably not going to state the contractual and factual basis for the rejection.
Of course, it’s not going to include the required certificate of good faith. And then finally, even a more robust response from a lawyer that may provide some additional detail and may reference the contract sections still is not going to be sufficient because it’s going to lack the required certificate of good faith. And so given those conclusions, the court did agree with Tocci and ordered all of those funds paid over to Tocci.
One important caveat to the appeals court’s ruling that even if a owner fails to properly reject a pay requisition, that would not necessarily strip the owner of its contractual defenses under the contract. And so in this case, the owner was still permitted to challenge whether Tocci’s work complied with the contract documents. And to the extent that it could persuade a court or jury that the work failed to comply with the contract documents, it may be entitled to get those funds back, even if under the Prompt Pay Act it’s required to pay those fines over because of the failure to reject the pay requisitions promptly under The Act.
And then just one final point I thought was worth mentioning; From an owner’s perspective, it may seem a little ill conceived that the court has sort of elevated the form over substance in requiring this pro forma certificate of good faith. But the court’s response to that, I thought, was interesting in that it recognized that the construction industry is a fast paced business, that there’s a large volume of communications that are exchanged daily, that sometimes things get heated, and that by requiring a certificate of good faith, it sort of causes all parties to slow down and think about what their response to a pay requisition is before the response is finalized, and therefore to allow cooler heads to prevail before a final decision is made. So that’s essentially Tocci in a nutshell.
And I’ll turn it back over to Jim for some final thoughts.
Thank you, Chris. That’s very helpful. Just to pick up on your last point, as I thought about Tocci and its impact, where I really see this playing out, even more importantly in the construction arena in real time is with respect to change orders as Dayana mentioned. It’s essentially the same process and the same rules. And at least in my years of experience litigating disputes that arise out of projects that derail many, many of them do so on account of ill will that festers over the course of a project because change orders are not dealt with promptly and properly.
And this certainly should change that landscape, at least to some degree. So I guess the moral of the story is twofold. First of all, owners take note – this law means what it says, and it’s going to be enforced by the courts for what it says. Remember Nicole’s acronym, WRC Writing Reasoned and Certified. And then for contractors, you know, you can win the battle, but you might still lose the war.
So that if you succeed in enforcing the strict requirements of this law and you, in fact, get paid, don’t spend it all in one place, if the dispute lingers on, because the owner has not lost the fight entirely at that point. That is a wrap for today’s webinar. We appreciate your viewing this with us. If anything comes to mind, questions issues or the like, you can reach any one of us through the Conn Kavanaugh website.
Meanwhile, until the next time, have a good day. Thank you. Thank you, panelists.Share with your network: