Finding Teeth in Massachusetts' Prompt Payment Act
In Tocci v. IRIV Partners, LLC, Boston Harbor Industrial Development LLC and Hudson Insurance Co. (November 19, 2020, Sup. Ct. 19-405), the Massachusetts Superior Court granted summary judgment on a contractor’s breach of contract claim based on Massachusetts’ Prompt Payment Act, M. G. L. c. 149 § 29E (the “Prompt Pay Act” or “Act”). In Tocci, the court found that, based on undisputed facts, the project owner failed to comply with the Prompt Pay Act’s requirements and such failure was a breach of contract as a matter of law. The decision awarded contract damages in excess of $4 million based on a contractor’s payment applications that were not timely objected to during construction. The Court’s order in the summary judgment stage demonstrates that the Act has real “teeth” in a litigation setting. The decision is a powerful example for project owners and contractors of why it is critical to comply with the requirements of the Prompt Pay Act.
With limited exceptions, Massachusetts’ Prompt Pay Act applies to all private projects where the prime contract has an original value of $3 million or more and a party would be entitled to a lien under Massachusetts lien statute, M.G.L. c. 254. The Prompt Payment Act imposes mandatory requirements concerning when contractors are paid and also sets forth time periods for review of payment applications. The Act requires written statements regarding the factual and contractual basis for any rejection or reduction of contractors’ (or subcontractors’) payment requisitions. Any such rejection or reduction must be certified as made in good faith. The provisions of the Prompt Payment Act are mandatory and contract provisions that purport to waive the Act are deemed void and unenforceable.
In Tocci, the court found the owner’s repeated failure to comply with the Act, both by not properly or timely rejecting the contractor’s payment applications in writing and by not timely paying the contractor, supported a breach of contract and an award of damages. The Court noted under the Act “a recipient of a payment requisition — typically a project owner or manager — has a total of 60 days after submission of a payment requisition to object to it, and any rejection must comply with three requirements under the Act: it must (1) be in writing; (2) include an explanation of the factual and contractual basis for the rejection; and (3) be certified to have been made in good faith.” The time period of 60 days resulted from the court adding the 15 days set forth in the Act for when an initial review of a payment application must be performed to the 45 days that the Act requires for payment to be made (at which time the right to object expires). The court noted the owner on the project at issue had sent emails purporting to reject payment applications after the time period required by the Act and these emails failed to contain the factual and contractual basis required. Further, the court noted that “the Act reflects a policy decision made by the Legislature that progress payments in construction cases like this are to be made promptly, and failing to issue a separate and final judgment as to the Requisitions in dispute would frustrate that legislative choice.”
The Tocci case is a strong reminder that owners and contractors must carefully comply with the terms of the Prompt Payment Act. The review of payment applications must be done in a timely manner and when portions of a payment application are rejected the rejection: 1) must be within the time periods required by the statute; 2) must include a description of the factual and contractual basis for the rejection; and 3) must be certified in good faith. Failure to follow these steps opens parties up to an award as occurred in Tocci.
Should you have any questions regarding the proper procedure for evaluating or rejecting a payment application on a construction project in Massachusetts, please reach out to a construction law attorney at Verrill.