In a business where time is money, large construction projects – at least those that are properly managed – proceed at a feverish pace. To keep up, project managers up and down the chain are often forced to communicate with one another in shorthand – a quick phone call, text message, or email, rather than something more formal – and to prioritize emergencies over the exchange of routine paperwork. But, at least according to one Superior Court judge, PMs must reconsider how and when they respond to one category of routine submissions: payment applications.
The Prompt Pay Act
For many years, parties to private construction contracts in Massachusetts had been generally free to negotiate any payment terms they wanted. This laissez-faire approach worked well for large owners and contractors with the bargaining power to dictate terms to business partners. But for smaller contractors at the other end of the bargaining table – many of whom relied on regular payments to make ends meet – the system proved unworkable.
To address this power imbalance, in 2010, the legislature passed the Prompt Payment Act, G.L. c. 149, § 29E. The Act, which applies to most projects with a prime contract worth more than $3 million, sets protocols for submitting and responding to periodic payment applications. In a nutshell, the Act requires that: 1) pay applications be submitted on a cycle of no more than 30 days; 2) applications be approved or rejected, in whole or in part, within 15 days of submission; and 3) payments be made within 45 days of approval.1 To properly reject a pay application, the Act requires a written notice of the “factual and contractual” reasons for the rejection, along with a certification that rejection has been made in good faith. If no such rejection is supplied within the prescribed time, the pay application is “deemed to be approved.”2
The Test Case: Tocci Bldg. Corp. v. IRIV Partners, LLC
While the Prompt Pay Act is applauded for leveling the playing field in the construction industry, questions have lingered about whether the Act is punitive enough to accomplish its purposes. That is, where the Act lacks any specific language addressing the penalty for violations, should parties feel free to disregard its mandates? According to at least one judge, who addressed the issue in a recent owner/contractor pay dispute, the answer is an emphatic “no.”
The project involved the construction of a building in Boston’s Seaport District. Over the second half of 2018, the contractor submitted seven pay requisitions for its work. In response to each of those requisitions, the owner sent the contractor only a perfunctory email explaining in vague terms why it was partially rejecting the requisition. The contractor sued the owner, arguing that because the owner had not strictly followed the Act’s protocol in rejecting the requisitions, the requisitions were deemed to be approved, and the owner had to pay them in full.
The court agreed with the contractor. Strictly construing the Act, it held that because the owner’s emails neither stated the factual and contractual basis for rejecting the requisitions nor incorporated the required certificate of good faith, the owner waived the right to challenge the contractor’s requisitions. The court reasoned that because the Act reflects an important public-policy decision to ensure prompt payment of contractors, its terms must be given the teeth needed to compel compliance.
Lessons for Construction Industry
The court’s decision – assuming it withstands appellate scrutiny – reinforces that the Prompt Pay Act is no dead letter. Owners and upstream contractors must strictly comply with its terms or risk forfeiting their right to reject the applicable pay application. Under the Tocci court’s reasoning, this rule appears to be firm. That is, for example, there is no exception even for work that clearly fails to pass muster. Once the Act’s deadline passes, the right to refuse payment is waived, no matter how shoddy the work.
So, what steps should owners and upstream contractors take to make sure they are complying with the Act?
- As an initial matter, to the extent that you interpret “prompt” to mean “quick” or “hasty,” you should reconsider. Speed is only one component of the Act. The other, more important, part is precision in supplying a carefully worded rejection notice. Proceed diligently, not hastily.
- If you do decide to reject an application for payment, in whole or in part, you must supply the factual and contractual reasons underlying the rejection. The notice should provide as much detail as possible, including specific references to the parties’ contract. And, although pro forma, the rejecting party must include a certificate affirming that it is rejecting the application in good faith.
- If you submit and review pay applications through third-party software programs (e.g., Textura, GCPay), be aware that many of these programs were not designed with the Prompt Pay Act in mind. If your program does not include fields to include a detailed description of the reasons for the rejection and a good faith certificate, you should send supplemental correspondence that includes the required language.
- For approved work, payment must be made within 45 days of approval. If an application is partially rejected, the approved pay items still should be paid timely.
- If you miss a deadline, communicate with the contractor as soon as possible. Although the Act may have harsh consequences for transgressors, professionals should favor quick, informal resolution over litigation that undoubtedly will sour even the most longstanding business association.
1 The deadline for approving or rejecting a pay requisition is extended by 7 days for each tier below the prime contract.
2 Subject to two narrow exceptions, the Prompt Pay Act also renders conditional payment clauses unenforceable. That is, the general contractor cannot condition payment to its subcontractors on the receipt of its own payment from the owner.Share with your network: