The Appeals Court’s decision in Tocci Building Corp. v. IRIV Partners, LLC, 101 Mass. App. Ct. 133 (2022), construes, for the
first time, the provisions of the Prompt Payment Act (“Act”) and has a wide-ranging impact on how payment applications are to be processed and responded to, which owners and developers need to be aware of.
The
Act, G.L.
c. 149, § 29E, applies to private contracts for construction
valued at $3 million or more, including projects for the erection, alteration,
repair or removal of structures. It provides maximum time limits in which
payment applications are to be submitted and processed:
Every contract for construction
shall provide reasonable time periods within which: (i) a person seeking
payment under the contract shall submit written applications for periodic
progress payments; (ii) the person receiving the application shall approve or
reject the application, whether in whole or in part; and (iii) the person
approving the application shall pay the amount approved. The time periods for
each application for a periodic progress payment shall not exceed: (i) for
submission, 30 days, beginning with the end of the first calendar month
occurring at least 14 days after the person seeking payment has commenced
performance; (ii) for approval or rejection, 15 days after submission…and (iii)
for payment, 45 days after approval…
To comply with the Act, a rejection of
a payment application, “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.”
Tocci clarifies that the
requirements of the Act cannot be waived. Though submission and response
periods may be shortened by agreement, they cannot be contractually extended
beyond the time limits outlined in the statute.
Any provision in a contract that violates the Act is void and
unenforceable.
The contract
between the parties in Tocci provided that the contractor, Tocci
Building Corporation, would “submit to the Owner and the design professional a
monthly application for payment” and that the Owner would pay “the amount…due
on any payment application…no later than thirty (30) days after the
[contractor] has submitted [the] application, or such shorter time period as
required by applicable state statute.”
It also provided that the Owner could adjust or reject a payment
application “[n]o later than fourteen (14) Days after receipt of an
application” by giving written notice “stating its specific reasons for such
disapproval or nullification and the remedial actions to be taken by the by the
[contractor] in order to receive payment… .”
In Tocci,
the contractor submitted seven applications for periodic progress payments to
IRIV Partners, LLC, which remained unpaid after completion of the project. IRIV’s responses to Tocci’s payment
applications included: (1) a letter stating that the contractor was in default
for failing to “supply enough qualified workers on the project to
satisfactorily maintain the approved schedule” and stating that IRIV reserved
its right to pursue claims against Tocci, and to withhold payments, if the
default was not cured; (2) a letter indicating that IRIV was withholding part
of its payment according to the General Conditions and General Requirements,
without further explanation; (3) requests for copies of Tocci’s subcontracts;
and (4) requests for materials supporting an application. The Appeals Court
found that these responses, because they did not include an explanation as to
why the applications were being rejected or a certification that IRIV’s
decision not to issue payment was made in good faith, failed to constitute
timely rejections that complied with the contract or the Act and that, as a
result, the applications were deemed approved in full.
In
a rare exercise of its discretion, the Appeals Court, after issuing its
original decision, issued a revised opinion clarifying that an owner who is
required to pay a disputed but “deemed approved” amount nevertheless retains
its rights to bring counterclaims against the contractor, stating in its
revised opinion: “A party that under the statute makes a periodic payment in
response to an application, rather than rejecting it, may nonetheless bring any
and all claims it has for breach of contract against the payee and may recoup
any money it may be owed.” Thus, IRIV,
even though it was required to pay Tocci for its work, could continue to pursue
its counterclaims against the contractor for breach of contract, breach of the
implied covenant of good faith and fair dealing, negligence, fraud and
violation of G.L.
c. 93A.
Following
Tocci, owners and their design professionals can no longer reject
payment applications without explanation, or engage in what was a fairly common
practice of delaying responses to payment applications, including allowing
deadlines to pass or requesting further information or supporting materials
that result in a response being issued beyond the statutory fifteen (15) days,
or shorter time if provided in the contract – practices that contractor in the
past customarily accepted. If a
determination is made that an application should be rejected, the rejection
must be in writing and include:
-
A statement of its factual basis,
i.e. the reasons why the application is being rejected.
-
A statement of its contractual
basis, i.e. cite the terms of the contract that are the basis of the
rejection.
-
A certification that the rejection
is being made in good faith.
The
relatively short time constraints in the Act, which the Appeals Court has now
held are strictly enforceable, have and will undoubtedly continue to frustrate
owners and contractors, precluding them from engaging in what can sometimes
require extended discussion and negotiation over payments, and at other times
causing owners to reject applications out of caution. One way to avoid these issues is to incorporate
a “pencil requisition” into a contract’s payment provisions. A pencil requisition is a draft payment
application submitted for review by the owner and its design professionals, for
possible adjustment and ultimate agreement on what the formal payment
application will include. Experience has
shown that this process benefits both owners and their contractors, as the extra
time and ability to collaborate before the formal process is initiated often results
in the resolution of issues that may not be able resolved within the statutory
response period.
