Construction Project Executives Beware: The Massachusetts Prompt Pay Act Means Business
If you are an executive involved in a Massachusetts construction project, the routine pay applications you exchange in the ordinary course must now receive your utmost attention — as any failure to reject a pay application in strict accordance with the law will result in approval. On June 7, 2022, the Massachusetts Appeals Court, in Tocci Bldg. Corp. v. IRIV Partners, LLC, 101 Mass. App. Ct. 133 (2022), issued the first appellate decision interpreting the Massachusetts Prompt Payment Act, which was passed in 2010. The Court held that a project owner’s failure to issue certified and timely pay application rejections resulted in the applications being deemed approved under the Act. This means anything short of strict statutory compliance will not meet legal requirements when rejecting applications for payment. This decision has far-reaching consequences and will mean common forms of rejection, if not coupled with detailed reasoning and a certification of good faith, will be considered approved.
Basics of the Prompt Payment Act
The Act provides the following payment application framework:
First, a payment application must be approved or rejected “15 days after submission;” otherwise it is “deemed to be approved” under the Act.
Second, “approved” payment applications (or “deemed approved” payment applications) must be paid within “45 days after approval” (or a shorter period if provided for in the parties’ contract) unless the application is “rejected before the date payment is due.” Stated differently, even if an application is deemed to be approved because an owner failed to timely respond to the payment application, the owner may nevertheless reverse the deemed approval if, before the 45-day period to make payment expires, the owner provides a statutorily compliant rejection.
Third, a proper rejection must (i) be made in writing, (ii) include an explanation of the factual and contractual basis for the rejection, and (iii) be certified to have been made in good faith.
Summary of the Lawsuit and Appeal
Tocci was retained as general contractor to construct a building in Boston, Massachusetts and brought suit against the project owner and construction manager for breach of contract relating to seven unpaid payment applications, valued at more than $4.6 million. Tocci moved for summary judgment on its breach of contract claim, arguing payment was wrongfully withheld under the Act and, therefore, was in breach of the parties’ contract. The trial court agreed, explaining that the Act “supplemented” the parties’ contract and “trumped any contrary provisions” within it.1
The trial court found the defendants failed to properly reject Tocci’s payment applications under the Act, and the payment applications must be treated as approved. Thus, Tocci was entitled to receive full payment as demanded.
Rejection Without Support and Good Faith Certification Will be Deemed Approval
The Appeals Court agreed and affirmed the trial court decision. In doing so, the Court examined the circumstances surrounding each application for payment and succinctly concluded the defendants never issued an effective rejection because the defendants did not certify the facts and deficiencies in the pay application. Accordingly, each was “deemed approved by operation of law on the date payment was due, and each became due and payable.” Notably, the Court reached this conclusion despite evidence that the defendants did in fact communicate a rejection to Tocci regarding the various payment applications.
Following Tocci’s submission of the first payment application at issue, the defendants delivered a notice of default under the contract, which referenced the defendants’ right to withhold payment. The Court observed that the letter, however, did not actually “invoke that right,” such that it was not a rejection in compliance with the Act. Likewise, the defendants later sent Tocci an email advising that it was holding back one line item on Tocci’s payment application, but this too failed to comply with the Act. The Court explained it was too late (payment was already due) and did not include a contractual or factual explanation as to why that line item was held back, nor did it include a certification of good faith. The application was therefore approved under the Act.
Other examples are even more startling. For instance, Tocci submitted one payment application for approximately $1 million, and the defendants responded with an email advising that it was withholding approximately $150,000 for two line items but paid the remainder. The Court held the entire amount of the application was deemed approved, explaining that the defendants’ email “does not explain the contractual or factual basis for the deduction, nor does it contain the required certification” of good faith.
In another example, the defendants responded to Tocci’s payment application by requesting “back up” for a list of items on the application. Even if the email could be construed as providing the contractual and factual basis for withholding payment, the Court observed it did not contain the requisite certification of good faith such that it was not an effective rejection. The Court rejected the argument that the certification requirement was merely “ministerial.” Instead, the Court held that a certification of good faith is an “essential component” of the Act, and it “ensures not only that the owner be deliberate about rejecting applications for periodic progress payments, and that it takes care to reject them in good faith,” but its presence on a communication provides a contractor with “clear indication” that an application has been rejected, “so that the contractor can know both that some response is needed and that time periods have been triggered for invoking what remedies are available.”
After examining each application and concluding there were no effective rejections, the Court concluded the applications were “deemed approved by operation of law,” and Tocci was entitled to payment in full.
Key Lessons and Takeaways for Project Executives
While the Appeals Court decision in Tocci is certainly a cautionary tale for project owners, it is instructive for all parties to private construction contracts in Massachusetts that are subject to the Act,2 as well as projects in other states governed by similar prompt pay statutes.
Whereas parties in the past may have assumed informal discussions or requests for back up to support payment applications meant they were beyond the purview of the Act, Tocci is clear that the Act is triggered upon the submission of an application for payment. Within that framework, decisions to approve or reject payment applications must be made promptly, and rejections (in whole or in part) must substantively comport with the Act.
As a practical matter, however, one way to dull the potentially pointed effects of the Tocci decision is to incorporate the concept of a “pencil requisition” into the contractual payment structure, something that we often recommend to owners and contractors alike. A pencil requisition is, essentially, a draft payment application that is submitted for review, adjustment, and (ideally) agreement on what the formal application for payment will include. Through this additional step, parties can often identify and address issues that may have otherwise yielded a rejected payment application.3
This is particularly true in the aftermath of Tocci, as owners may err on the side of rejection under the Act to avoid an argument that a payment application was “deemed approved” by operation of law. In this way, the pencil requisition process not only fosters a collaborative working relationship on construction projects, but it provides contractors with more clarity regarding the payment application process while also better positioning owners to review payment applications in good faith and to take action in compliance with the Act.
In the absence of a pencil requisition process in the contract, owners must be vigilant and make certain that payment applications are promptly reviewed by appropriate levels of project executives to avoid the 15-day “deemed approved” language in the Act, triggering the payment requirement in at least 45 days. Further, if a payment application (or even a single item) is disputed, care must be taken to explain the factual and contractual basis for the rejection to ensure it is proper. And, critically, certifications of good faith must accompany any rejection (whole or in part) of an application for payment. The Appeals Court has made clear that failure to do so is fatal and will result in an unintended approval of the application in full.
1 Interestingly, the trial court observed that the parties’ contract contained more stringent timing requirements — requiring rejections to be made within 14 days of submission (rather than 15 days) and that payment must be made 30 days after submission (rather than 45 days after approval), but it applied the “more defendant-friendly deadlines contained in the Act.” The Appeals Court applied the contractual deadlines, presumably because those provisions had the result of being even more exacting than the Act, rather than “waiv[ing] or limit[ing] any provisions of the Act,” which would be “void and unenforceable.” G.L. c. 149, § 29E(g); see also G.L. c. 149, § 29E(c) (providing that the “time periods for each application for a periodic progress payment shall not exceed” the prescribed time periods) (emphasis added).
2 The Act applies to private construction projects where the contract value exceeds $3 million. G.L. c. 149, § 29E(a).
3 It is important to note the pencil requisition process cannot violate the 30-day periodic payment requirement under the Act, so the contract requirements will need to be carefully drafted. See G.L. c. 149 § 29(E)(c) & (g).