Attorney Stephanie Bendeck Discusses the SJC's Interpretation of the Prompt Payment Act and Gives Tips to Owners and Contractors for Compliance

Not Merely Ministerial: What Tocci Means for Owners and Contractors

The Supreme Judicial Court made waves in the Massachusetts construction world on June 7, 2022, when it construed the Prompt Payment Act (G.L. c. 149, § 29E) for the first time. Under the decision in Tocci Bldg. Corp. v. IRIV Partners, LLC, 101 Mass. App. Ct. 133 (2022), project owners processing applications for periodic progress payment must strictly comply with the Act’s requirements, and the failure to do so can be costly. Applications for payment, if not properly rejected pursuant to the Act and the terms of the controlling project contract, will be deemed approved by operation of law, regardless of any alleged defective work or other breaches that the project owner wished to address. Until now, rejections for payment made by owners frequently lacked a certification that the rejection was made in good faith. However, the Court concluded that the inclusion of this good faith certification is an essential requirement and not merely ministerial in nature.

What is the Prompt Payment Act?

The Prompt Payment Act, enacted in 2010, applies to certain private construction contracts with an original contract price of $3,000,000 or more.[1] The purpose of the Act is twofold: (1) to guarantee the prompt payment of invoices for periodic payment made by contractors, and (2) to guarantee the prompt resolution of disputes surrounding such invoices. To achieve these goals, the Act requires every construction contract to include provisions establishing reasonable time periods for submitting written applications for periodic progress payments, approving or rejecting such applications in whole or in part, and paying approved applications. The Act, as its name suggests, sets maximum time limits for completion of each of these phases. The period to submit an application for periodic payment cannot exceed 30 days. The period to approve or reject submitted applications cannot exceed 15 days, and the period to complete payment following approval cannot exceed 45 days. The contract must also establish a procedure for resolving disputes over rejected payments.

An application for progress payment under the Act is considered proper if it is in writing and submitted pursuant to the terms and conditions of the applicable contract. After receipt of a proper application for payment, the owner is required to provide approval or rejection under the Act. If an owner is opting to reject the application, then the Act requires that such rejection be (1) made in writing; (2) include a factual and contractual basis for the rejection; and (3) and be certified as having been made in good faith. Following the rejection, the parties must submit the rejection to the applicable dispute resolution procedure under the construction contract. Commencement of the dispute resolution process cannot be delayed more than 60 days after the rejection.

What Happened in Tocci?

The issue in Tocci was whether IRIV Partners, LLC (“IRIV”) and Boston Harbor Industrial Development, LLC (“BHID”) wrongfully withheld payments in response to seven applications for periodic payment submitted by Tocci Building Corporation. Tocci also asserted other claims, and BHID and IRIV asserted counterclaims against Tocci, but those other claims were not decided at the summary judgment stage. The trial court ruled that BHID and IRIV could not postpone issuing payment to Tocci until those other claims were ultimately resolved. Rather, Tocci’s submission of applications for payment triggered an obligation to either accept or reject them promptly, and to do so in compliance with the statutory requirements in the Prompt Payment Act. Because BHID and IRIV had not complied with those requirements, the trial court ruled that the payments had been wrongfully withheld. On appeal, the Supreme Judicial Court agreed.

The first step of the Court’s analysis focused on the terms of the contract. In any construction contract dispute, the issues will almost always be framed by and analyzed under the four corners of the contract itself. The Court then examined whether each application for payment was properly submitted, and whether the rejections of those applications complied with the Act.

Timing was also a critical component. The Court considered whether IRIV issued its rejections prior to the date that payment was due. It also examined whether IRIV included a contractual or factual explanation for the rejection, and whether IRIV included a certification that the rejection was made in good faith.

Finally, the Court was not convinced that the requirement of a good faith certification accompanying all rejections for payment could be ignored. The Court pointed out that complex construction projects frequently contain mounds of communications between the owner and the contractor, including communications relating to payment and compliance with the contract. The certification requirement helps to ensure that the owner is making a measured, deliberate decision to reject the application, and that it is acting in good faith. The presence of the certification of good faith in the rejection definitively shows the contractor that the application has been rejected, that a response from the contractor is needed, and that the contractor has limited time to avail itself of any remedies under the terms of the contract.

After finding that IRIV had not complied with these requirements, the Court affirmed the entry of partial summary judgment in Tocci’s favor.

What This Means for Owners and Contractors

Owners can still make claims against contractors for breach of contract, defective work, and any other claims that may arise during the course of the project. What an owner cannot do is withhold a periodic progress payment in response to an application without issuing a statutorily compliant, timely rejection. Thus, if an owner has claims for breach of contract or defective work and seeks to deny payment on that basis, then the owner must comply with the Act and include those claims as part of its reasoning in denying the application. Otherwise, the application for payment will be deemed approved by operation of law, leaving owners with the costly recourse of attempting to recoup their damages in court, after issuing payment for work they do not consider worthy of payment. Here is a checklist to make sure that the Act is being complied with:

Does the Act Apply?

1. Is this a contract for a private entity? (i.e., not a public entity such as a State government, Federal government, any governmental agency, public school, etc.). If yes, then go to 2.
2. Is the original price of the contract for the work to be performed $3,000,000 or more? If yes, then go to 3.
3. Is the work for a commercial property, or for a residential property consisting of more than 4 dwelling units? If yes, then the Act applies.

Handling of Applications for Periodic Progress Payments

1. Have a copy of the contract. Remember, the terms of the contract always control but they cannot go beyond what the Act allows. Any provisions in the contract that go beyond what the Act allows are void and unenforceable.
2. Review the contract for the time period to submit the application for periodic progress payment.
3. Ensure that the application for periodic progress payment is in writing and sent to the appropriate contacts outlined in the contract and within the period required by the contract. The Act allows up to 30 days.
4. Once the written application for periodic progress payment is received, then the owner must approve or deny the request. Check the contract for the time that an owner must issue its approval or denial. The Act allows up to 15 days.

Approved Applications for Periodic Progress Payments

If approved, then the owner must issue payment under the time allowed under the contract. The Act allows payment to be made up to 45 days after approval.

Denied Applications for Periodic Progress Payments

An owner who thinks the application should be rejected must do all of the following:

1. 1. The rejection must be in writing.
   2. The rejection must include a factual basis. In other words, explain the facts and circumstances supporting the rejection.
   3. The rejection must include a contractual basis. Include the specific terms from the contract that are the basis for rejecting the application. The best practice is to specifically cite the terms in the contract. If any rights under the contract are being asserted, then those rights and the terms on which they are based should also be specifically cited.
   4. Include a certification that the rejection is being made in good faith. Good faith means that the rejection is made after careful review and done with an honest belief or purpose, not fraudulent intent.

If any of the above elements are missing, then the rejection is deemed approved under the Act.

After an Application is Rejected

The parties must refer back to the contract to determine the designated method of dispute resolution for a rejected application. Dispute resolution must be commenced within the time frame specified by the contract. The Act allows up to 60 days following rejection.

Stephanie Bendeck and the rest of the team at Melick & Porter assist construction professionals with navigating complex construction defect claims, contractual issues, and injury claims. If you have any questions regarding the SJC's Tocci decision, the Prompt Payment Act, or any other construction-related inquiry, please contact our firm's Construction Law group at (617) 523-6200.