In a groundbreaking move aimed at fostering fair competition and empowering workers, the Federal Trade Commission (FTC) issued a final rule last week to ban noncompete agreements nationwide. This ruling may carry profound implications for the construction industry, prompting construction businesses to reassess their practices and ensure compliance while maintaining competitiveness. Let’s explore how construction companies, large and small, can navigate this regulatory shift effectively.

Understanding the Impact

Noncompete clauses have long been a staple in employment contracts within the construction sector, often used to protect proprietary information and retain skilled talent. However, the FTC’s ban on noncompetes demands a reevaluation of these practices. Employers must recognize the potential consequences of noncompliance, including legal repercussions and reputational damage, and take proactive steps to adapt to the new regulatory landscape.

Communications with Employees

The FTC rule requires employers to provide a form notice of non-enforcement to all present and former employees subject to an unexpired noncompete provisions. However, given the immediate legal challenges to the FTC’s rule and the fact that the 120-day compliance window has not yet begun, there is no reason to take immediate action or begin notifying employees. Instead, business owners should wait for at least 60 days before taking concrete action in response to the rule to see if any court temporarily enjoins the effectiveness of the rule.

Assessing Existing Agreements

Assuming the rule goes into effect, however, it will apply to almost all employers who use noncompete provisions. The first step for employers in the construction industry is to conduct a thorough review of existing noncompete agreements within your workforce. Identify employees who are currently bound by noncompetes and assess the scope and enforceability of these agreements in light of the FTC’s ruling. It’s crucial to understand which agreements may remain enforceable, particularly for senior executives, and which will be nullified under the new rule.

Exploring Alternatives

In the absence of noncompete agreements, construction companies must explore alternative strategies to protect their interests and proprietary information. Consider implementing robust trade secret policies and non-disclosure agreements (NDAs) to safeguard sensitive data and intellectual property, as well as non-solicitation provisions to protect customer relationships. These measures offer effective protection while preserving workforce mobility and fostering a culture of innovation.

Preparing for the Future

As the construction industry adapts to the regulatory changes, employers must remain vigilant and proactive in addressing evolving workforce dynamics. Even if the rule is delayed or nullified for some reason, there has been a move by many states in recent years to limit the use of noncompetes. Stay informed about developments in labor law and regulatory guidance from the FTC to ensure ongoing compliance. Continuously evaluate and refine employment practices to promote fairness, competitiveness, and employee retention in a post-noncompete era.

Conclusion

The FTC’s ban on noncompetes potentially represents a seismic shift in employment practices within the construction industry, which (if deemed lawful) necessitates a swift and strategic action from employers. By understanding the implications of the new rule, limiting communications with employees, and implementing alternative strategies for protection, the construction industry can navigate this transition with confidence. Embracing a culture of fair competition and innovation will not only ensure compliance with regulatory requirements, but also foster a more dynamic and resilient workforce for the future.

In a recent Board decision dated December 13, 2023, the United States Army Corps of Engineers sought to amend its answer in the case of APPEALS OF – KELLOGG BROWN & ROOT SERVICES, INC., under Contract No. W912GB-13-C-0011. The proposed amendment introduces an affirmative defense, contending that Kellogg Brown & Root Services, Inc. (KBR) made material misrepresentations in its proposal, rendering the fully-performed contract void ab initio.

Background: The contract in question, executed on July 9, 2013, was for the construction of an Aegis Ashore Missile Defense System site in Deveselu, Romania, with a firm, fixed-price amount of $134,211,592. The Corps moved to amend its answer to allege that KBR’s material misrepresentations induced the Corps to enter the contract, justifying the voiding of the contract. The alleged misrepresentations include issues related to subcontractor quotes, firm fixed prices, subcontracting plans, and more.

Motion to Amend and Legal Defense: The Corps, despite delays in formally amending its answer, argued that KBR was aware of the potential affirmative defense before the conclusion of fact discovery. The proposed affirmative defense asserts that KBR made eight material misrepresentations in its proposal, upon which the Corps relied in awarding the contract and defending against a GAO protest.

The alleged misrepresentations included:

  1. Inaccurate subcontractor quotes in KBR’s proposal.
  2. Misrepresentation of firm fixed prices and acceptance of subcontract terms.
  3. Misrepresentation of the scope and value of work subcontracted to a key subcontractor.
  4. Failure to self-perform 25% of the total work as required.
  5. Falsely claiming to have submitted a Technical Assistance Agreement to the Directorate of Defense Trade Controls.
  6. Inaccurate calculation of average Romanian labor costs.
  7. Misrepresentation regarding the availability of a Quality Control Manager.
  8. False statements about the small business subcontracting plan.

The Board granted the Corps’ motion to amend its answer to include the material misrepresentation affirmative defense, indicating that this legal defense will be considered on its merits.

Key Points:

  1. Background Knowledge: The decision highlights that the Corps knew about seven of the eight alleged material misrepresentations in 2013 and 2014 while performance was ongoing and became aware of the eighth by 2017.
  2. Jurisdiction and Futility: The decision refutes KBR’s arguments regarding jurisdiction, futility, and the Board’s authority to make findings of fact regarding material misrepresentations. The Board asserts its jurisdiction to hear the material misrepresentation defense without a contracting officer’s final decision.
  3. Undue Delay and Prejudice: While acknowledging the Corps’ significant delay in raising the defense since obtaining knowledge, the decision states that the delay did not rise to the level of extreme delay necessary to deny the motion to amend.
  4. Authority to Make Findings: The decision asserts the Board’s authority to make factual findings regarding material misrepresentation, differentiating it from certain fraud claims beyond the Board’s jurisdiction.
  5. Potential Waiver: The decision leaves open the question of whether the alleged misrepresentations render the contract void ab initio (no waiver) or voidable, which would allow KBR to assert that the Corps waived the defense by accepting performance.

Lessons Learned: This Board decision sheds light on the complexity of legal issues in government contracts, particularly when affirmative defenses such as material misrepresentation are introduced. The Corps ‘ motion to amend its answer opened the door to a thorough examination of KBR’s actions during contract formation and performance, emphasizing the importance of transparency and accuracy in government contract proposals. As the case unfolds, it will be intriguing to see how the alleged misrepresentations impact the overall validity of the contract and whether the defense holds water in legal proceedings.

The construction industry is one of the most complex and challenging sectors. Projects can be highly demanding and require a significant amount of planning and coordination to complete successfully. However, with advancements in technology, specifically the use of artificial intelligence (AI) and chat GBT, the construction industry can experience a transformation in how it operates.

One of the significant challenges in construction projects is the management of data. Information is collected from various sources and needs to be organized and analyzed to make informed decisions. AI can play a significant role in data analysis by providing real-time insights into the project’s progress. This can help in predicting potential delays, identifying areas where cost savings can be made, and even improve safety measures.

Chat GBT, a natural language processing tool, can assist in project management by acting as a virtual assistant to construction managers. The software can be programmed to answer questions about the project, provide updates on the progress, and even suggest solutions to potential problems. This can help in reducing the workload of the project manager and allow them to focus on other critical tasks.

Moreover, AI can be utilized in risk management in construction. With the help of AI, companies can identify potential risks early on and take necessary steps to mitigate them. This can help in reducing the number of accidents and injuries that occur on construction sites. AI can also help in predicting and preventing equipment breakdowns, which can result in significant delays and additional costs.

Another way AI can help in construction is through the use of virtual reality (VR) and augmented reality (AR) technology. With VR and AR, construction workers can visualize the project in a 3D environment, making it easier to identify potential issues and make informed decisions. This can help in reducing the time and resources required to make changes to the project later on.

The use of AI can also help in reducing the cost of construction projects. With the help of AI, companies can identify areas where cost savings can be made, such as optimizing the use of materials and reducing waste. This can result in significant cost savings, which can be passed on to clients.

Do we know the full ramification of AI on the modern construction project? No. However, construction industry partners can use AI, chat GBT and VR to improve project management, reduce risks, and lower costs. As technology continues to advance, it is essential for the construction industry to cautiously embrace AI and fully appreciate the upside and the risk.

Social media has become a powerful tool for small to medium-sized construction companies to generate leads for both residential and commercial projects. With over 3 billion people using social media worldwide, there is a huge opportunity for construction companies to reach potential customers and promote their services.

Following are some tips for contractors to use social media to generate leads and improve their revenue targets in 2023.

Firstly, it is important to choose the right social media platforms. Different social media platforms have different user demographics and can be more effective for certain types of projects. For example, Facebook and Instagram are popular platforms for residential projects, while LinkedIn is more effective for commercial projects. By understanding the target audience and selecting the right social media platforms, small construction companies can improve the effectiveness of their social media marketing efforts.

Secondly, construction companies should use high-quality visuals to showcase their work. Social media is a highly visual medium, and construction companies can use this to their advantage by posting high-quality photos and videos of their past projects. This can help potential customers to visualize the quality of their work and gain trust in the company’s abilities.

Thirdly, construction companies should engage with their audience on social media. Responding to comments and messages in a timely manner can help to build trust and establish a strong relationship with potential customers. Construction companies can also use social media to answer frequently asked questions and provide valuable information about their services and the construction process.

Fourthly, contractors should use social media to highlight their unique selling points. This can include their experience, certifications, awards, or any other factors that set them apart from the competition. By highlighting these factors on social media, construction companies can improve their credibility and attract potential customers who are looking for a trusted and experienced partner.

Finally, in the residential space, construction companies can potentially use social media to offer exclusive promotions and discounts. This can be a powerful way to attract new customers and build a loyal customer base. By offering exclusive promotions on social media, construction companies can also track the effectiveness of their social media marketing efforts and adjust their strategies accordingly.

Social media has become an essential tool for small construction companies to generate leads and promote their services. By choosing the right social media platforms, contractors can improve the effectiveness of their social media marketing efforts and attract more customers. As social media continues to evolve, construction companies should stay up-to-date with the latest trends and adapt their strategies accordingly to remain competitive in the industry.

It’s that time of year again – the holiday season is upon us, and for those in the construction industry, that can mean a few extra challenges when it comes to maintaining efficiency on the job site.

Here are five best practices for dealing with labor during the holiday season:

  1. Communicate early and often: Make sure to clearly communicate any changes to the schedule or workload to your team as early as possible. This will give them time to plan and prepare, and help prevent any potential issues from arising.
  2. Offer incentives: Consider offering incentives to encourage your team to stay focused and productive during the holiday season. This could be something as simple as a bonus or extra time off, or something more creative like a gift card or other prize.
  3. Stay organized: The holiday season can be a busy time, so it’s important to stay organized and on top of your schedule. This means keeping track of deadlines, delegating tasks effectively, and staying in close communication with your team.
  4. Keep safety in mind: Safety should always be a top priority, but it’s especially important during the holiday season when distractions and fatigue can be more common. Make sure to enforce all safety protocols and procedures, and encourage your team to speak up if they see any potential hazards.
  5. Be flexible: Finally, it’s important to be flexible during the holiday season. Your team may have commitments or obligations outside of work, and it’s important to be understanding and accommodating where possible. A little flexibility can go a long way in maintaining a positive and productive work environment.

Overall, the key to maintaining efficiency on a construction project during the holiday season is good communication, organization, and flexibility. By following these best practices, you can help ensure that your team stays focused and productive, even during the busiest time of year.

Today’s guest post is by one of my favorite construction lawyers and friends, Burr partner Ned Nicholson in our Columbia, SC office.  Ned regularly represents clients in construction defect and compensation claims, manufacturer/dealer disputes, and insurance coverage lawsuits. He is also a South Carolina certified mediator. Ned can be reached at nnicholson@burr.com or (803) 799-9800.

If you are a homebuilder, residential housing developer, construction industry insurer, or any one of the many participants in the industry providing affordable and decent housing for the citizens of South Carolina, you are already aware that South Carolina courts have for decades prioritized the promotion of consumer (i.e., home buyer) rights, usually at the expense of the providers of housing.  There is nothing inherently wrong with that; the goal is laudable.  But as in so many things, the implementation has been extremely costly for the residential construction industry as a savvy plaintiff’s bar has taken advantage of grey areas that are inevitably created in our judicial system.

For example, years ago a South Carolina Supreme Court Justice proudly stated that “South Carolina, through both its courts and legislature, has previously been in the vanguard of protecting consumers, particularly in the area of home construction.”  Reynolds v. Ryland Group, Inc., 531 S.E.2d 917, 921 (S.C. 2000).  It is also no secret to builders and insurers that South Carolina’s joint and several liability rules mean that if a builder is only 1% negligent in the cause of construction defects, the builder can still get stuck with 100% of the damages, with the courts leaving it up to the builder to try and collect from other negligent parties.

It is therefore no surprise that in South Carolina, and nationally for that matter, homebuilders have attempted to bring some economic fairness to the table by inserting arbitration clauses in their construction and sales contracts.  Arbitration is a private dispute resolution method where parties to a contract agree that instead of going to court in a public lawsuit, any dispute will be handled by a neutral third party, usually an attorney, in a more informal and less expensive manner than the court system.  Usually the homebuilders attempt to ensure that arbitrators knowledgeable in the construction world will decide such disputes, so that experts truly decide the disputes.

Not surprisingly, plaintiff’s lawyers do not generally like arbitration, as they tend to believe their client homeowners would be more fairly treated by a jury or judge who are not construction experts and perhaps would be more sympathetic to a consumer in a close case.  Because of that, there are constant attacks on arbitration clauses in the courts as owners try to find creative ways to bypass binding arbitration.

Beware!  The South Carolina Supreme Court on September 14, 2022 embraced one of those creative bypasses in Damico v. Lennar Carolinas, LLC, et al, Op. No. 28114.  In Damico, the homebuilder had masterfully integrated special warranty clauses, arbitration clauses, and other contract documents to provide a clear, reliable outline and process for both the home buyer and the homebuilder to follow for dispute resolution by arbitration.  Or so the homebuilder thought.

To the surprise of the builder, the Court held that the arbitration clauses were “unconscionable,” and thus not enforceable.  The only way the Court could reach that conclusion was that the arbitration clause in this case did not say that issues of enforceability of the arbitration clause were for the arbitrator, not the courts, to decide.  (If a clause says that, the court must stop and defer to the arbitrator on that issue.)  Unfortunately for the homebuilder in this case, the elaborate arbitration clause missed that one checkpoint, which opened the door for the Court to attack the clause itself.

And attack it did.  With the adroitness of a prize fighter, the Court bobbed and weaved through various legal barriers that ordinarily may have ended its decision making process and made its way to the unconscionability holding.  The Court seized on the arbitration clause’s joinder provision that provided that the homebuilder at its sole option could join any subcontractors or other potentially liable parties in the arbitration.  The Court held that this seemingly minor procedural issue made the clause unconscionable and unenforceable because normally the plaintiff (home buyer) decides who to sue and this provision took that right away.  The Court believed it also could lead to inconsistent results in other forums and force the homeowner to litigate the same issues in court.

Of course, in the real world, there is almost always a chance of there being many forums.  The homeowner can always sue at fault subcontractors in court under other theories; that happens all the time.  The reasoning of the Court if taken to its extreme could undermine almost any arbitration clause since the home buyer does not have contracts with subcontractors and thus no arbitration clauses.

So how does a homebuilder avoid the trap created by the Court in Damico Perhaps a work-around could be if homebuilder includes in every subcontract an arbitration provision that allows a home buyer to demand arbitration against a subcontractor as well as joinder in an arbitration with the homebuilder.   Another way may be the well-known legal maxim of KISS (Keep It Simple Stupid.)  Drafters of arbitration clauses may want to keep the clause very vanilla—for example, beyond the basic language needed to ensure arbitration is applicable to a dispute, let the rules of a national arbitration association govern and do not insert any procedural hurdles that a court could in any way interpret to be unfair in some way to the consumer.  And of course, make sure that the arbitrator, not a court, will determine if a clause if unconscionable or not.

There are other lessons to be learned from Damico, and the homebuilders will certainly face a new round of attacks on their contracts as lawyers and courts start applying the opinion in not just the homebuilder industry, but consumer transactions in general.

This weekend was all about The Rise of Gru.  I love Gru so much that when my children ask for money, my best Gru-like voice belts back: “Now, I know there have been some rumors going around that the bank is no longer funding us….In terms of money, we have no money.”  And that’s precisely what many lenders say on distressed projects when the owner fails to make final payment and the contractor looks to the bank for funding: “We have no money for you contractor!”

In BCD Associates., LLC v. Crown Bank, CA No. N15c-11-062 (Super. Ct. Del, May 2, 2022), the trial court found that when a bank pays a contractor directly, it can create a legally binding relationship subject to the terms of the construction loan agreements with the owner.

The project involved a $13m construction loan between the lender and the owner to renovate a hotel.  The owner and contractor entered into an AIA Contract for the construction management services.  During construction the contractor would submit payment applications to the lender, who would review and approve the invoices for payment.  The lender then would pay 90% of the approved payment application and hold back the remaining 10% as retainage.  The contractor was supposed to be paid the final retainage upon completion, which it did not receive in accordance with the terms of the AIA Contract.

While the contractor asserted numerous claims against the lender—including breach of contract, unjust enrichment, promissory estoppel, and misrepresentation—ultimately the court found that the lender breached contractual obligations owed to the contractor.  Applying New Jersey law, the court held:

The controlling documents are the Loan Commitment and the Loan Agreement. The Court recognizes that [contractor] is not a named party in those agreements. Moreover, the Court acknowledges that the Loan Agreement specifically provides that there are no third-party beneficiaries to the Loan Agreement. But, contractually, factually and practically, [contractor] is the intended third-party beneficiary to the Loan Commitment and the Loan Agreement. Moreover, [owner] and [lender] treated [contractor] as a third-party beneficiary to the applicable agreements.

The court found it important that the lender chose to “cut out the middle man” by paying the contractor directly at all times.  Finally, the court also found sufficient basis to find in favor of the contractor on its unjust enrichment and promissory estoppel claims, but was not able to recover for misrepresentation.

Lessons learned. For contractors, the decision in BCD Associates is a good reminder to look beyond the owner for sources of funding.  Even if the lender on the project says there is no more funding, the bank may nonetheless be on the hook if it has made direct payments to the contractor during the project.  For owners and lenders, be aware that your actions may create third-party beneficiaries despite clear language in the loan documents to the contrary.

Excuse the eye patch, as I just had retina surgery yesterday.  I am surprised at how different the world looks with only one eye to focus—from the depth of the stairway, to the water flowing from the sink, to the words flying out from the computer screen.  In other words, there is more than meets the eye, a problem that many employers and employees face when a dispute arises.

In Mankin Media Systems, Inv. v. Timothy Crowder, No. 19CV-48300W (Jun. 30, 2022), the Court of Appeals of Tennessee reversed the confirmation of an arbitration award because the so-called arbitration clause appeared in the employee handbook and was not a stand-alone agreement.  Because the handbook did not constitute an enforceable employment contract, the appellate court concluded that the trial court erred in ordering the parties to arbitrate in the first instance and later in affirming the arbitrator’s award.

The employer in Mankin hired the employee as a salesperson, a position that gave the employee access to certain confidential and proprietary information. At the time of hire, the employee signed an acknowledgement of receipt of the employee handbook, which contained an arbitration clause.  The handbook expressly negated any contract of employment:

  • “. . . the Employee Handbook is not an employment contract, and nothing in this Employee Handbook gives an employee any right, express or implied, to continue employment.”
  • “[A]ll terms, conditions, policies, and procedures as stated in this document are subject to change, and nothing stated herein is guaranteed to remain a fixed term or condition of your employment.”
  • Nothing in this employee Handbook creates a binding employment contract between Company and its employees or provides a guaranty of continued employment for any amount of time.”

When the employee left, he allegedly downloaded from his computer and took certain confidential information. The employer filed suit against the former employee in state court, and the employee filed a motion to dismiss based upon the arbitration clause in the employee handbook.  The trial court denied the motion to dismiss, but stayed the lawsuit and ordered the parties to arbitrate.

Following an arbitration hearing, the arbitrator denied the employer’s request for damages and entered a final award in favor of the employee.  The employer filed a motion to vacate the award, arguing that the arbitrator exceeded its authority.  The trial court granted the employee’s motion to confirm the award.

The court of appeals reversed the trial court, holding that the employee handbook was not a valid and enforceable contract:

As set out above, the Handbook clearly states that it is not intended to be a contract, and further states that the provisions therein are subject to unilateral change without the employee’s consent. Therefore, under the foregoing authority, we conclude that the Handbook does not constitute a valid, enforceable contract between the parties.

Although the trial court ultimately concluded that the Handbook was not a valid employment contract, it nonetheless enforced the arbitration provision of the Handbook. This was error. In the absence of a valid contract requiring arbitration, there was no basis for the trial court to order the parties to arbitrate. Rather, the lawsuit was subject to adjudication by the trial court and should not have been decided by arbitration.

Lessons learned.  There are a couple of lessons from the Mankin decision.  First, there is always more than meets the eye.  In what would appear to be a clear and express indication by the parties to arbitrate their dispute, the writing may not be enforceable if not part of an enforceable contract.  Second, and you have seen these words before on this blog, words matter.  Parties to a construction contract need to make sure that there are no conflicting provisions and they pay special attention to the arbitration provisions if they intend to arbitrate disputes.  In this case, the employer seemed to want to arbitrate employment disputes by including such a provision in its employee handbook, but later wanted to litigate disputes.

Sometimes you “do” bad things.  Sometimes you “look like” you do bad things.  Just look at the difference between Bad-boy Jack and my youngest daughter, who just “looks like” she’s up to no good.  In the world of construction contracting, both can get in you in trouble, including a termination for default of performance.

nogood

Appeals of  Industrial Consultants, Inc. d/b/a W. Fortune & Company, ASBCA No. 59622 (2017) involved a construction contract to upgrade an HVAC system at a facility in New Hampshire. The Board held that the contractor was properly terminated for default where: (1) it repeatedly insisted on changing the design of the project; (2) it furnished the submittals consistently late and at times did not submit them; (3) it did not respond to certain communications regarding design changes and rejections; and (4) it never submitted a safety plan.

The Facts.  Following award of the contract to the successful bidder, immediate concerns arose regarding the design. The contractor’s president believed there was a defect in the design and he began to offer suggestions on redesign. The contractor submitted numerous RFI’s, to which the government responded. During the process, the contractor delayed in providing submittals and often times never provided submittals. The contracting officer sent a notice to the contractor demanding the contractor to cure its deficiencies.  Numerous communications are back and forth between the parties, all of which demonstrated that the contractor was accusatory and combative.  In the end, the contracting officer has sent three cure notices and ultimately issued a termination for default.

The Decision. The Board found that the contractor failed to proceed with the work in violation of FAR 52.233-1 (Disputes) (June 2008), which requires that the “contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the contracting officer.” As to the merits, the Board found:

The government bears the burden of demonstrating that [the contractor] did not perform in a timely manner and that it failed to gain approval of its submittals. Failure to proceed with the work during a dispute is a ground for termination for default. In this appeal, it is undisputed that [the contractor] failed to complete the work on time, failed to proceed with the work after the Corps rejected its proposed changes to the project, and failed to furnish some submittals and failed to gain approval of other submittals. The government has made a prima facie case for default termination; [the contractor]must, therefore, prove that its nonperformance was excusable.

The Board then found that the contractor’s default was not excusable—as it had a basic misunderstanding as to its role as a contractor on the project.

Lesson Learned.  Ultimately, the Board concluded that “government contractors must perform the contracts they execute and cannot require the government to rewrite the contract so that they can build some other project they like better.”  In this case, the contractor questioned the design of the HVAC system and notified the government of those concerns.  But in the end, the government  chose to proceed with the design. At that point, the contractor had one choice: continue to build the project as it had contracted to do.  It did not have the option to act bad by “dragging its feet” and refuse to perform, which ultimately led to the termination for default.

In life, rejection is often hard to swallow.  In construction, that rejection can sometimes amount to millions of dollars.  A Massachusetts court recently held that an owner’s rejection of the contractor’s payment applications was not properly certified and, thus, violated the state’s Prompt  Pay Act.

In Tocci Building Corp. v. IRIV Partners, LLC, (App. Ct. Mass. June 7, 2022), the court was asked to construe for the first time the provisions of Massachusetts’s Prompt Payment Act, which applies to certain private construction contracts in excess of $3,000,000. The Act requires that progress payments shall not exceed: 30 days for submission; 15 days after submission for approval or rejection; and 45 days after approval for payment.  Notably, if the owner does not provide an approval or rejection within 15 days of a proper payment application, then the payment application will “be deemed to be approved”.

What is a proper rejection under the Act?  The statute specifies that “[a] rejection of an application for a periodic progress payment, whether in 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.” A rejection notice under the statute can be subject to the parties’ dispute resolution clause, but any contract provision that causes delay to commencement of the dispute resolution period longer than 60 days is void and unenforceable.

In Tocci, disputes arose between the owner and contractor over seven interim payment applications that were, in whole or part, not paid by the date required in the parties’ contract. The owner alleged the contractor performed defective work and failed to perform warranty work when required.  The court reviewed each of the payment applications and determined whether the owner’s emails and other communications constituted valid “rejections” under the Act.  Ultimately, the court concluded that each disputed payment applications was “deemed approved” because the rejections: (1) came after the date payment was due; (2) did not contain a contractual or factual explanation; and/or (3) did not contain a certification that it was made in good faith.

Much of the court’s decision focused on whether the owner’s communications were properly certified within the meaning of the statute:

The Legislature required this certification if a rejection is to be effective, and we are not free to ignore that requirement by deeming it merely ministerial—to do so would be to read the requirement out of the statute. In any event, the certification requirement is an essential component of the scheme set up by the statute. As this case reflects, on a complicated construction project, there may be an enormous amount of communication back and forth between the owner and the contractor. Much of it may touch on issues involving compliance with the contract, and much of it may touch on payment. The certification requirement ensures not only that the owner be deliberate about rejecting applications for periodic progress payments, and that it takes care to reject them only in good faith, its presence on a communication also provides a clear indication to the contractor 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.

The court made clear that the owner’s claims of defective work and other breaches of contract were not waived by the failure to include these items in a proper rejection under the statute.

So what? If your project is subject to Massachusetts law, the decision in Tocci provides an excellent summary of the Prompt Pay Act.  However, the decision also provides a good lesson to parties involved payment disputes on a construction: follow the letter of the law  In other words, while you may have factual or contractual reasons supporting your position, the law may impose certain requirements to preserve and/or prevail on your claims. Make sure your contracts are up to date with the most recent laws of your state, and that you have checklists in place when disputes arise.