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.