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Prompt Pay Act means business

For executives involved in Massachusetts construction projects, the routine pay applications that are exchanged in the ordinary course of business must now receive their utmost attention — as any failure to reject a pay application in strict accordance with the law will result in approval.

In Tocci Bldg. Corp. v. IRIV Partners, LLC, the Appeals Court held that a project owner’s failure to issue certified and timely pay application rejections resulted in the applications being deemed approved under the act. That means anything short of strict statutory compliance will not meet legal requirements when rejecting applications for payment.

The decision has far-reaching consequences and will mean common forms of rejection, if not coupled with detailed reasoning and a certification of good faith, will be considered approved.

Basics of Prompt Payment Act

The act provides the following payment application framework:

  • First, a payment application must be approved or rejected “15 days after submission,” otherwise it is “deemed to be approved” under the act.
  • Second, “approved” payment applications (or “deemed approved” payment applications) must be paid within “45 days after approval” (or a shorter period if provided for in the parties’ contract) unless the application is “rejected before the date payment is due.” Stated differently, even if an application is deemed to be approved because an owner failed to timely respond to the payment application, the owner may nevertheless reverse the deemed approval if, before the 45-day period to make payment expires, the owner provides a statutorily compliant rejection.
  • Third, a proper rejection must (i) be made in writing, (ii) include an explanation of the factual and contractual basis for the rejection, and (iii) be certified to have been made in good faith.

What happened here

Tocci was retained as general contractor to construct a building in Boston and brought suit against the project owner and construction manager for breach of contract relating to seven unpaid payment applications, valued at more than $4.6 million.

Tocci moved for summary judgment on its breach of contract claim, arguing payment was wrongfully withheld under the act and, therefore, was in breach of the parties’ contract.

The trial court agreed, explaining that the act “supplemented” the parties’ contract and “trumped any contrary provisions” within it.

The trial court found the defendants failed to properly reject Tocci’s payment applications under the act, and the payment applications must be treated as approved. Thus, Tocci was entitled to receive full payment as demanded.

The Appeals Court agreed and affirmed the trial court decision. In doing so, the court examined the circumstances surrounding each application for payment and succinctly concluded that the defendants never issued an effective rejection because they did not certify the facts and deficiencies in the pay application. Accordingly, each was “deemed approved by operation of law on the date payment was due, and each became due and payable.”

Notably, the court reached that conclusion despite evidence that the defendants did in fact communicate a rejection to Tocci regarding the various payment applications.

Following Tocci’s submission of the first payment application at issue, the defendants delivered a notice of default under the contract, which referenced the defendants’ right to withhold payment.

The court observed that the letter, however, did not actually “invoke that right,” such that it was not a rejection in compliance with the act.

Likewise, the defendants later sent Tocci an email advising that it was holding back one line item on Tocci’s payment application, but this, too, failed to comply with the act. The court explained it was too late (payment was already due) and did not include a contractual or factual explanation as to why that line item was held back, nor did it include a certification of good faith. The application was therefore approved under the act.

Other examples are even more startling. For instance, Tocci submitted one payment application for approximately $1 million, and the defendants responded with an email advising that it was withholding approximately $150,000 for two line items but paid the remainder. The court held the entire amount of the application was deemed approved, explaining that the defendants’ email “does not explain the contractual or factual basis for the deduction, nor does it contain the required certification” of good faith.

In another example, the defendants responded to Tocci’s payment application by requesting “back up” for a list of items on the application. Even if the email could be construed as providing the contractual and factual basis for withholding payment, the court observed it did not contain the requisite certification of good faith such that it was not an effective rejection.

The court rejected the argument that the certification requirement was merely “ministerial.” Instead, the court held that a certification of good faith is an “essential component” of the act, and it “ensures not only that the owner be deliberate about rejecting applications for periodic progress payments, and that it takes care to reject them in good faith,” but its presence on a communication provides a contractor with “clear indication” 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.”

After examining each application and concluding there were no effective rejections, the court concluded the applications were “deemed approved by operation of law,” and Tocci was entitled to payment in full.

Lisa F. Glahn is a partner and construction attorney at Foley & Lardner in Boston and vice chair of the construction practice. Partner Jeffrey R. Blease is chair of Foley’s construction practice. Max. S. Meckstroth is an associate and litigation lawyer at the firm.

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