Construction project executives beware: Massachusetts prompt payment law means business | Foley & Lardner LLP
If you are an executive involved in a construction project in Massachusetts, routine payment requests that you exchange in the normal course should now receive your utmost attention, as any refusal to reject a payment request in strict accordance with the law will result in an approval. On June 7, 2022, the Massachusetts Court of Appeals, in Tocci building. Corp. against 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 deny timely and certified requests for payment timely resulted in the applications being deemed approved under the Act. This means that anything that is not strictly in accordance with the law will not meet the legal requirements when rejecting payment requests. This decision has far-reaching consequences and will mean that common forms of rejection, if not accompanied by detailed reasoning and an attestation of good faith, will be considered approved.
Basics of the Prompt Payment Act
The law provides the following payment enforcement framework:
First, a payment request must be approved or rejected “15 days after submission”; otherwise, it is “deemed approved” under the Act.
Second, “approved” payment requests (or “deemed approved” payment requests) must be paid within “45 days of approval” (or a shorter period if the parties’ contract provides for it) unless the request is “rejected before the date payment is due.” In other words, even if a request is deemed approved because an owner has not responded in a timely manner to the request for payment, the owner may nevertheless cancel the deemed approval if, before the expiry of the 45-day period to make payment, the owner provides a conforming rejection.
Third, a proper rejection must (i) be 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 trial and appeal
Tocci was retained as general contractor to construct a building in Boston, Massachusetts and sued the project owner and construction manager for breach of contract over seven unpaid payment claims, valued at more than $4.6 million. of dollars. Tocci sought summary judgment on his claim for breach of contract, arguing that the payment was wrongfully withheld under the law and, therefore, was in violation of the parties’ contract. The lower court agreed, explaining that the law “supplemented” the parties’ contract and “deleted any provision to the contrary” it contained.1
The trial court found that the defendants had failed to properly dismiss Tocci’s claims for payment under the law, and the claims for payment should be treated as approved. Thus, Tocci was entitled to receive full payment as demanded.
Rejection without support and certification in good faith will be considered approval.
The Court of Appeal accepted and upheld the decision of the trial court. In doing so, the Court reviewed the circumstances surrounding each compensation claim and succinctly concluded that the defendants never issued an effective dismissal because they failed to certify the facts and deficiencies of the compensation claim. Accordingly, each was “deemed approved as of right on the date payment was due, and each became due and payable.” Notably, the Court reached this conclusion despite the evidence that the defendants did in fact communicate a refusal to Tocci concerning the various requests for payment.
Following Tocci’s presentation of the first demand for payment at issue, the defendants delivered a notice of default under the contract, which referred to the defendants’ right to withhold payment. The Court observed that the letter, however, did not actually invoke “that right”, so it was not a legal dismissal. Similarly, the defendants then sent Tocci an email informing him that he was withholding an element of Tocci’s payment request, but that too was not in accordance with the law. The Court explained that it was too late (payment was already due) and did not include a contractual or factual explanation as to why this position had been chosen, nor an attestation of good faith. The application was therefore approved under the Act.
Other examples are even more striking. For example, Tocci submitted a request for payment for approximately $1 million, and the defendants responded with an email informing him that he was withholding approximately $150,000 for two positions but paying the rest. The Court ruled that the full amount of the claim 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, defendants responded to Tocci’s demand for payment by requesting a “backup” for a list of items on the claim. Even if the email could be interpreted as providing the contractual and factual basis to withhold payment, the Court observed that it did not contain the required certification of good faith, so it did not constitute an effective rejection. . The Court rejected the argument that the certification requirement was simply “departmental”. Instead, the Court ruled that a good faith certification is an “essential component” of the Act, and that it “not only ensures that the owner deliberately rejects requests for periodic installment payments, and that it take care to reject them in good and due form”. faith”, but its presence on a communication provides a contractor with a “clear indication” that a request has been rejected, “so that the contractor can know both that a response is needed and that time limits have been triggered to invoke available remedies.”
After reviewing each request and finding that there had been no actual denial, the Court concluded that the requests were “deemed approved as of right”, and Tocci was entitled to full payment.
Key lessons and takeaways for project managers
While the decision of the Court of Appeal in Tocci is certainly a cautionary tale for building owners, it is instructive for all parties to private construction contracts in Massachusetts that are subject to the law,2 as well as projects in other states governed by similar prompt payment laws.
While in the past parties may have assumed that informal discussions or requests for support in support of payment requests meant they fell outside the scope of the Act, Tocci It is clear that the law is triggered when a claim for payment is submitted. Within this framework, decisions to approve or reject requests for payment must be made promptly, and rejections (in whole or in part) must be substantially in accordance with the Act.
In practice, however, one way to mitigate the potentially acute effects of Tocci The decision is to incorporate the concept of ‘request in pencil’ into the contractual payment structure, which we often recommend to owners and contractors. A pencil requisition is, essentially, a draft payment request that is submitted for review, adjustment and (ideally) agreement on what the formal payment request will include. With this extra step, parties can often identify and resolve issues that could have led to a payment request being rejected.3
This is especially true following Tocci, as landlords can err on the side of dismissal under the Act to avoid an argument that a payment request has been “deemed approved” as of right. In this way, the pencil request process not only promotes a collaborative working relationship on construction projects, but it provides contractors with more clarity regarding the payment request process while allowing owners to better position themselves to review the requests for payment in good faith and take action in accordance with the act.
In the absence of a pencil request process in the contract, owners should be vigilant and ensure payment requests are promptly reviewed by the appropriate levels of project executives to avoid the 15 day delay. “deemed approved” in the law, triggering the payment requirement. in at least 45 days. Additionally, if a claim (or even a single item) is disputed, care should be taken to explain the factual and contractual basis for the dismissal to ensure it is correct. And, above all, certificates of good faith to have to accompany any rejection (total or partial) of a request for payment. The Court of Appeal made it clear that failure to do so is fatal and will result in unintended approval of the entire application.
1 Interestingly, the trial court observed that the parties’ contract contained stricter timing requirements – requiring rejections to be made within 14 days of submission (instead of 15 days) and payment to be made. 30 days after submission (rather than 45 days after approval), but it applied the “timeframes more favorable to defendants contained in the statute”. The Court of Appeal applied the contractual deadlines, presumably because these provisions resulted in being even more demanding than the law, rather than “waiver[ing] or limit[ing] any provision of the Act”, which would be “void and unenforceable”. GL c. 149, § 29E(g); see also GL c. 149, § 29E(c) (providing that the “time limits for each request for periodic installment payment must not exceed” the prescribed deadlines) (emphasis added).
2 The Act applies to private construction projects where the contract value exceeds $3 million. GL c. 149, § 29E(a).
3 It is important to note that the process for requesting pencils cannot violate the 30-day periodic payment requirement under the Act, so contract requirements will need to be drafted carefully. See GL c. 149 § 29(E)(c) & (g).