On June 7, 2017, the Massachusetts Appeals Court, in Tocci Building Corporation vs. Irv Partners, LLC 101 Mass. App. Ct. 133 (2022) a case of first impression, issued its decision confirming the effectiveness of the “Prompt Pay Act.” G.L. c. 149, § 29E.
A. Background of the Prompt Pay Act
In 2010, the Massachusetts legislature enacted the “Prompt Pay Act.” G.L. c. 149, § 29E. The Prompt Pay Act applies to contracts for private construction projects with an original contract price of $3,000,000.00 or more¹. The Prompt Pay Act requires that contracts and subcontracts must provide for a reasonable time frame in which periodic payment applications are submitted, approved or rejected, and/or paid to the requesting entity.
If an application is rejected in whole or in part, the rejection must be certified as made in good faith, and the factual and contractual reasons for the rejection must be submitted to the requesting entity in writing. If the application for payment is not accepted or rejected within a reasonable time frame, it will be deemed accepted, however, an application for payment may be rejected, in whole or in part, at any time before payment is due.
Under the Act, a reasonable time frame for submittal cannot exceed thirty (30) days starting with the end of first calendar month occurring at least fourteen (14) days after the entity begins performance, a reasonable time frame for approval or rejection after submission cannot exceed fifteen (15) days, with an additional seven (7) days added for each tier below the prime contract, and a reasonable time frame for payment cannot exceed forty-five (45) days after approval – whether express or deemed approval.
If, in response to a proper application for periodic progress payment, the owner does not provide approval or rejection, in whole or in part, within fifteen days (or a shorter period of time if the contract so provides), the statute provides that the application will “be deemed to be approved unless it is rejected before the date payment is due.” G. L. c. 149, § 29E (c).
(¹This does not include projects for one (1) to four (4) dwelling units.)
B. What Tocci vs. Irv Partners Means for the Prompt Pay Act
i. Factual Background and Procedural History
Tocci Building Corporation vs. Irv Partners, LLC 101 Mass. App. Ct. 133 (2022) involved seven applications for periodic progress payments submitted by Tocci Building Corporation (“Tocci”), a general contractor, to IRIV Partners, LLC (“IRIV”), “Manager” for Boston Harbor Industrial Development, LLC,” denominated the “Owner” for work at 645 Summer Street in South Boston, Massachusetts (“Project”). IRIV had failed to make payments on each of the seven applications and those applications remained unpaid until after completion of the Project. Tocci filed suit against IRIV in Suffolk Superior Court claiming breach the contract, unjust enrichment and violations of G.L. c. 93A for wrongfully withholding periodic payments. IRIV filed counterclaims claiming that Tocci performed defective work, that Tocci failed to perform work, and that Tocci submitted fraudulent pay applications.
Tocci moved for summary judgment regarding the seven pay applications for which IRIV was in violation of the Prompt Pay Act. G. L. c. 149, § 29E (c). The Superior Court ruled that Tocci was entitled to amounts claimed under the seven pay applications because the IRIV, acting as the owner, failed to comply with the Prompt Pay Act by failing to effectively or timely respond to Tocci’s applications. IRIV appealed the Superior Courts decision to issue separate and final judgment.
i. Insufficient Rejection Even After A Timely and Detailed Default Notice.
Regarding all seven applications, the Appeals Court made a finding that IRIV failed to issue a rejection effective under the Prompt Pay Act prior to the dates that payment was due. The Appeals Court found that a default letter did not actually invoke the right to withhold payment and was therefore not a rejection in compliance with G. L. c. 149, § 29E. The Appeals Court also found that an email transmitted by IRIV to Tocci where IRIV claimed that “the General Conditions and General Requirements line item for Tocci was held back” did not comply with G. L. c. 149, § 29E as an effective rejection of those amounts claimed because it was not transmitted timely and did not contain a certification that it was made in good faith.
ii. A Pay Application Response Must Contain a Certification of Good Faith.
The Appeals Court discussed the importance of a certification of good faith after IRIV argued it was merely a ministerial requirement. The Appeals Court reasoned that the certification was the intent of the legislature and ensures that a rejection be deliberate, doing so only when it can be rejected in good faith.
iii. What about Counterclaims, Defaults, Defects, Offset, and Recoupment?
The Appeals Court made it clear that the rights under IRIV’s counterclaims were not waived, and that the counterclaims may entitle IRIV to recoupment, but, unless IRIV complied with the requirements of G.L. c. 149, § 29E, IRIV could not withhold payment application amounts to satisfy those claimed amounts. The Appeals Court reasoned that “Separate and Final Judgment” was appropriate because to allow IRIV to retain moneys wrongfully withheld in violation of the statute until the final resolution of the lawsuit “would eviscerate the scheme for prompt payment or rejection-and-resolution created by the Legislature.”
C. Key Takeaways
On June 8, 2022, the Massachusetts Appeals Court, for the first time, analyzed and confirmed the effectiveness of Massachusetts “Prompt Pay Act” regarding a payment dispute between an owner’s representative and a general contractor. The Appeals Court’s holding re-emphasizes the necessity of complying with the requirements of the Prompt Pay Act. When the Superior Court first issued its decision in Tocci, the Superior Court gave the Prompt Pay Act teeth. The Appeals Court upholding that ruling means that contractors must strictly comply with the provisions of the Prompt Pay Act or they could lose important contractual rights such as effectiveness of a “pay-when-paid” provision and ability to withhold payment for incomplete or deficient work. The Prompt Pay Act (G.L. c. 149, § 29E) requires that a rejection to a periodic pay requisition must:
- be transmitted in writing;
- state a sufficient legal or factual basis for the rejection;
- be transmitted within the statutory time period; and
- provide a certification that the application was rejected in good faith.
Under the Prompt Pay Act, transmitting a default letter and/or claiming to withhold payment pursuant to a party’s contractual rights is insufficient to actually withhold payment. A notice of defective work or demand for further information, without a certification and explicit rationale for rejection is also insufficient. In other words, if the payment application itself is not expressly rejected in writing, setting forth the legally or contractual reasons for rejection, and certified in good faith, then a contractor is not entitled to withhold payment and the payment application is deemed accepted and due and payable. Parties must carefully review rejections of pay applications or amounts within pay applications for strict statutory compliance.