Highlights:
1. The Prompt Pay Law changes the parties’ obligations for submitting, reviewing, approving (or rejecting), and payment of contractor invoices and overrides any conflicting contract provisions negotiated between the parties.
2. Owners—and their project managers and design professionals—must understand, and not ignore, the statutory time limits and procedures set forth in the Prompt Pay Law for approving or rejecting contractor invoices and ensure that rejection of any amount sought is made in strict conformance with the requirements set forth in the law.
3. Given the mandatory framework imposed by the Prompt Pay Law, owners and contractors must give special attention to drafting contract terms that define how requisitions are submitted, the bases for rejection, and what constitutes a complete submission.
A recent Superior Court decision, Tocci Building Corp. v. IRIV Partners, LLC, Boston Harbor Industrial Development, LLC and Hudson Insurance Co., (November 19, 2020, Sup.Ct. 19-405), has interpreted the provisions of the Massachusetts prompt payment law, M.G.L. c. 149, Section 29E (the “Prompt Pay Law” or “PPL”). This is the first significant case to look under the hood of the Prompt Pay Law since its enactment in August 2010 and provides valuable guidance on key provisions of the will be interpreted. The PPL applies to most private construction project in Massachusetts with original contract values over $3 million and imposes mandatory requirements upon project owners and contractors with regard to processing of payment applications, change order requests, and distribution of payments to general contractors and subcontractors.
The Tocci case clarifies, in particular, the obligations of project owners to make timely and proper objections to a general contractor’s payment applications. Under the PPL, requisitions must be approved or rejected by the owner within 15 days of submission by the contractor. The owner is then required to pay the contractor the amounts approved for payment within 45 days of such approval. If the owner fails to object to the contractor’s application within the 15-day review period, the application will be deemed constructively approved unless the owner rejects the application before the date payment is due—which would be 60 days from the date of submission of the payment application.
If the owner rejects any part of the payment application, the owner is required by the PPL to do so in a writing that states the factual and contractual bases for the owner’s rejection and contains a certification that the owner’s action is made in good faith. Importantly, these statutory procedures and obligations may not be modified by contract between owner and contractor and any conflicting contractual provisions will be deemed null and void.
In Tocci, the dispute focused on whether the owner met its statutory obligations under the PPL relating to the timeliness and manner of review and rejection of the contractor’s payment applications. During the course of the project, Tocci submitted seven payment applications to the owner, each covering one calendar month of work. The owner did not issue a written objection (or take any other action) to the amounts sought within the 15-day review period or the following 45-day payment period. In response to certain payment applications submitted by Tocci, the owner emailed Tocci asking for back-up documentation, asking for analyses of billings relative to budget, informing Tocci that certain amounts were being withhold for unspecified reasons, or made no response whatsoever.
In determining whether the owner complied with the statute, the court concluded that the plain language of the contract means what it says—despite contract provisions between the parties that may seek to modify or soften requirements in the PPL. The owner’s failure to object timely—and in the manner required by the PPL—to the payment applications resulted in the requisitions being considered approved in full by operation of the law. Additionally, the court found that Tocci’s failure to plead the owner’s violations of the PPL did not waive the PPL’s applicability in this case.
What are the lessons here for project owners and their advisors? There are several. First and foremost, this case reinforces the PPL’s intention to force owners to timely and clearly articulate the bases upon which an owner’s denial of payment is based. The days of owners slow walking or rejecting without explanation contractor requisitions are gone. In short, if there are problems with requisitioning and payment, the PPL forces the owner to surface those problems timely or loose their ability to contest the amounts sought. As Tocci makes clear, when faced with an improper invoice, the owner must act within the statutory time limits to notify the contractor that there’s problem with the billing and do so in detail by setting forth the factual and contractual bases of the objections.
Second, the Tocci case underscores the importance of contract negotiation. While the basic framework of the PPL will be read into all contracts that fall under PPL jurisdiction, the terms and conditions that govern how requisitions are submitted, the bases for rejection, and what constitutes a complete submission remain largely with the contracting parties to negotiate. In essence, the PPL controls how an owner is required to process requisitions and not whether the requisitions must be approved or denied. In that regard, the construction contract remains the governing document.
Third, the Tocci case leaves unanswered questions and raises several others. For example, does the owner waive objections to payment if they are not raised in the written response within the 15-day or subsequent 45-day period? Similarly, does the PPL limit the owner’s ability to audit cost plus contracts beyond the statutory periods for approval or denial of requisitions? What occurs if the contractor submits its invoices weeks or months late—does the owner remain bound by the timelines set forth in the PPL?
In summary, the Tocci case provides valuable guidance on the practical impact of the Massachusetts Prompt Pay Law. It makes clear the significant consequences owners will suffer if they fail to follow statutory procedures, and it underscores the importance of careful drafting of contractual provisions relating to submission, certification, and payment of contractor requisitions.
If you have questions on the application of the Tocci decision or the Prompt Pay Law to your construction contracts or on-going projects, please feel free to contact Anatoly Darov ([email protected]).