I know what you are thinking . . . payment provisions have ALWAYS been key components of construction projects. Owners want to understand what they are paying for and that they are not over-paying. Contractors want prompt payment provisions and limitations on an Owner’s ability to withhold payment. Lower tier subcontractors and suppliers want clarity, information and remedies, other than what can be a cumbersome mechanic’s lien process, to ensure that they will get paid in the event of a dispute. So, I absolutely agree, payment provisions are essential. If payment is not made or the payment applications are not provided per the terms of the contract, it can cause delays and additional costs for all project participants.
A number of years ago, Massachusetts passed the Massachusetts Prompt Pay Act, G.L. c. 149, §29E (the “Act”). The purpose of the Act is to create some ground rules that are read into each private construction contract that is $3,000,000 or more. It creates time periods by which payment applications must be allowed and, importantly for this post, provisions for the review, approval, and rejection of a payment application. The Act requires certain formalities that may be a trap for the unwary such as:
Certification that the rejection is made in good faith
Failure to timely approve a payment application also has consequences such as having the payment application be deemed approved.
While there has been much discussion about the prompt payment and retainage law in Massachusetts since their enactment, there have been few cases applying the statutes. In a recent Massachusetts Superior Court case, a court found that when a contract and the Act are at odds, the Act controls and supplements or trumps any contrary provisions within the contract. Tocci Building Corp. v. IRIV Partners, LLC, C.A. No. 19-00405 (Mass. Super. Ct. Nov. 19, 2020). So, for that reason, we strongly advise all owners, contractors, and subcontractors to revisit their standard form contracts, conduct training with their project management teams, and take other actions appropriate for your organizations to ensure compliance with the Act. In this post, we summarize the Act and the Tocci case.
STATUTORY BACKGROUND
Subject to limited exceptions, the Act is applicable to all private construction projects “for which the person whose contract with the project owner has an original contract price of $3,000,000 or more.” Section 29E(a). Further, the act sets out requirements that “provide reasonable time periods within which: (i) a person seeking payment under the contract shall submit written applications for periodic progress payments; (ii) the person receiving the application shall approve or reject the application . . . and (iii) the person approving the application shall pay the amount approved.” Section 29E(c). The Act also provides time periods that shall not be exceeded for each application for a periodic progress payment. Id. Some of these are
- 30 days for submission
- 15 days for approval or rejection—which may be extended by 7 days for every tier of contract above such person, and
- 45 days from approval payment should be made.
The Act then provides that “[a]n application for a 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 the payment is due.” Id. However, the Act sets forth additional requirements for rejections of an application for a periodic progress payment. See id. For a rejection, “whether whole or in part, 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.” Id. Finally, the Act provides that “[a] provision in a contract for construction which purports to waive or limit any provisions of this section shall be void and unenforceable.” Section 29E(g).
THE TOCCI CASE
In Tocci Building Corp. v. IRIV Partners, LLC, Tocci Building Corp. (“Tocci”), entered into a written contract with IRIV Partners, LLC (“IRIV”) in October of 2016 to provide construction services and materials necessary to construct a building in downtown Boston. Tocci Decision at 2. The contract price was well over the required $3,000,000, which put the contract within the parameters of the Act. Id.
The Superior Court noted, however, that the subject contract included provisions clearly contrary to the Act. Id. at 5. Specifically, the contract provided for “14 days for rejections rather than 15 days, and 30 days after submission for payment rather than 45 days after approval.” Id. Nonetheless, Tocci submitted monthly applications for payment to IRIV pursuant to the contract. Id. Ultimately, seven applications were in dispute (Requisitions 20-26) and the court found that, even applying “the more defendant-friendly deadlines contained in the Act, IRIV failed to approve or reject the Requisitions within 15 days after submission, or within the following 45 days, when payment was due.” Id. Additionally, IRIV never provided a written rejection that “included an explanation of the factual and contractual basis for the rejection that was certified as made in good faith.” Id. at 5-6.
The first question for the court was “whether the Act’s provisions governing progress payments control[led], or whether the Contract d[id].” Id. at 10. The court determined that the Act clearly controlled, supported by subsection (g), which waives or limits any provisions that are contrary to the Act. Id. at 10 (citing G.L. c. 149, 29E(g)).
Next, the court noted that Tocci’s complaint, specifically Count I for breach of contract, did not cite to the Act; however, the court found that it “makes no difference.” Id. at 11. According to the court, “Tocci’s failure to have cited the Act [did not] change the legal conclusion that the Act, by operation of law, supplemented the Contract, trumped any contrary provisions within it, and applie[d] in this case through common law contract principles.” Id. The court reasoned that, because the Act’s provisions controlled, “IRIV had a limited period prescribed under the Act to lodge specific objections, requirements that were both more generous and more exacting than those contained in the contract.” Id. The court concluded that “in light of the undisputed facts, IRIV did not reject the Requisitions in the time or manner prescribed by the Act” and, thus, the consequences pursuant to subsection (c) applied and the Requisitions were “deemed to be approved.” Id.
While IRIV had sent emails and a letter to Tocci regard a few of the disputed Requisitions, the court determined that such notice “did not suffice under the Act as a rejection of any of the Requisitions.” Id. at 12. According to the court, this was so because IRIV:
-
Did not specifically reject a Requisition in dispute,
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Did not include an explanation of the factual and contractual basis for the rejection, and
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Did not include a certification that the rejection was made in good faith. Id.
Further, the court found IRIV’s argument that Tocci, by not requesting certification in good faith, waived the provisions of the Act, “simply erroneous.” Id. The court emphatically noted that the “Act’s provisions are mandatory and applicable . . . and reflect a public policy to ensure that contractors receive prompt payment, or prompt and complete notice of objections to payment requests, in large construction projects,” and that nothing supported the argument that the Legislature’s intent could be subverted through wavier. Id.
The takeaway from the Tocci Court is that Massachusetts Courts will likely enforce the Act per its terms. While other undefined issues remain, such as what happens if there is an egregious error in a payment application — will the statutory “deemed approval” still be given effect, it is wise for risk managers of owners, contractors, subcontractors to implement efforts to educate their project management teams about the Tocci decision and the Act. We will continue to update the Solid Foundation blog with updates to the Massachusetts Prompt Pay and Retainage Statutes.
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©2020 Pierce Atwood LLP. All rights reserved.National Law Review, Volume XI, Number 90
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