Prompt payment laws have been enacted in nearly every state in the US. The purpose behind these regulations is to attempt to correct the inherent imbalance when it comes to the payment process in the construction industry.
Massachusetts enacted their prompt payment statutes a mere decade ago — which means that the true bounds and limits of these regulations haven’t been fully put to the test — until recently, when a Massachusetts Superior Court held that the prompt pay provisions will be strictly enforced. Not just the timing of payments, but the specific requirements for rejecting pay applications.
The Massachusetts Prompt Payment Act
The Massachusetts Prompt Payment laws, enacted in 2010, provides timelines for construction payments and penalties for late payments. The specific timing for approvals or rejections and payment are found under Mass. Gen. Laws. ch. 149 §29E(c):
… The time periods for each application for a periodic progress payment shall not exceed… (ii) for approval or rejection, 15 days after submission; provided, however, that 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; and (iii) for payment, 45 days after approval, unless the payment is subject to the condition of receipt of payment by a third person but only to the extent enforceable under subsection (e). An application for periodic progress payment which is neither approved nor rejected within the time period shall be deemed to be approved unless it is rejected before the date payment is due. A rejection of an application for a periodic progress payment, whether in whole or in party, shall be made in writing and shall include an explanation of the factual and contractual basis for the rejection and shall be certified as made in good faith.” [emphasis added]
To boil these requirements down a bit: Once a pay app is submitted, the application must either be approved or rejected within 15 days.
Then, payment is due 45 days thereafter. Rejections must specify the requisition being denied, be made within the designated timeframe, include “factual or contractual” reasons for rejection, and be certified as made in good faith.
If a proper rejection isn’t provided, then the pay app is deemed to be approved.
For an in-depth breakdown, see Massachusetts Prompt Pay Act: Benefits and Requirements
As simple as this seems, a recent Massachusetts Superior Court has made it clear that these requirements are strictly enforced.
The importance of proper pay rejections under MA prompt pay laws
The case in question: Tocci Building Corporation v. IRIV Partners, LLC et al
- Owner: IRIV Partners, LLC (IRIV) [as agent/manager for Boston Harbor Industrial Development, LLC (BHID)]
- Contractor: Tocci Building Corporation, Corp. (Tocci)
Multiple pay apps rejected improperly
In 2016, Tocci entered into a contract with IRIV for the construction and improvement of property in Boston’s Seaport District. The contract was for a little over $3.7 million and designated IRIV as the “Owner” and the “Manager” for the “Property Owner” BHID.
Additionally, the contract terms also modified the deadlines listed in the prompt payment, as allowed under the Act. Specifically, the deadline to accept or reject a pay app was shortened from 15 to 14 days, and the deadline for payment was also shortened from 45 to 30 days after approval.
At some point during the project, payment issues began to arise. Seven consecutive payment requisitions submitted by Tocci were either denied, or a portion of the payment was withheld. In response, Tocci filed a lawsuit for breach of contract under the Massachusetts Prompt Payment Act.
At trial, Tocci moved for a partial motion for summary judgment in regards to the seven unpaid requisitions. IRIV and BHID submitted counterclaims based on breach of contract, negligence, and breach of express warranty, among others.
Rejections must include all of the required elements
The court began by reviewing IRIV’s responses to the pay apps in dispute. It determined that each response was lacking under the specific requirements under the Act.
The timing of their responses wasn’t the issue. Rather, each response (in one way or another) was found to be noncompliant with the specific requirements under the Act, as explained here:
“While they may have been timely in rejecting some of the Requisitions, they did not specifically reject a Requisition in dispute, did not include an explanation of the factual and contractual basis for the rejection, and did not include a certification that the rejection was made in good faith.”
IRIV contended that these were “merely technical errors,” and claimed that since Tocci didn’t request certification in good faith, Tocci waived the provisions of the Act. However, the court swiftly rejected this theory, stating the prompt payment provisions were mandatory and being applied to IRIV (not Tocci).
Since the rejections didn’t include the specific requirements under the Act, the applications were deemed approved.
Accordingly, the Court awarded Tocci the amounts claimed, minus retainage, totaling over $4.5 million.
Breach of contract defense to prompt payment being waived
As far as IRIV’s counterclaim for breach of contract, here’s an interesting turn of events. As you’ve seen, the provisions of the Massachusetts prompt pay laws are strictly construed and enforced. So much so that parties may also lose any legitimate defenses to payment if an improper rejection is issued.
As the Act provides, rejections of payments must assert the “factual and contractual basis” for the rejection — which IRIV failed to include in their rejections.
Given this, the court reasoned that since any contractual or factual objections weren’t provided in the rejection, IRIV had waived the right to rely on such objections or defenses.
Strict compliance is required under Massachusetts prompt pay laws
This decision is a fairly significant one for both owners and contractors. Making payments or rejections in a timely fashion is just the tip of the iceberg — especially when it comes to rejections.
Rejections should be as specific as possible. They should identify the particular pay app, provide the contractual and factual reasons for the rejection, and always include a good faith certificate. Not to mention being provided on time.
The devil is in the details here. Whether Tocci was actually entitled to those payments is irrelevant: By failing to strictly comply with the prompt payment requirements, not only were the pay apps deemed to be approved, but IRIV had also waived any contractual defenses to such payment.
Anyone involved in construction projects in Massachusetts should review their current documents and forms carefully to be sure that their rejections contain all of the required info. This particularly applies to those who automate or use third-party software for these processes.