The Massachusetts Legislature passed the state’s Prompt Pay Act 14 years ago to improve the downstream flow of money on most large-scale private construction projects. While the act established detailed protocols for administering applications for payment and other important construction phase processes, several questions about its interpretation and impact remained unanswered.
Over the years, I watched as a significant portion of the Massachusetts design and construction community either ignored the law’s exacting requirements or were unaware of their applicability. The first indication of how the act would be interpreted came in 2022, when the state appeals court decided Tocci Building Corp. v. IRIV Partners LLC. In that case, the court strictly construed the act. It held that an owner (and its agent) who failed to promptly advise the project’s general contractor of specific factual and legal reasons why it was withholding payment, coupled with a failure to certify that funds were being withheld in good faith, violated the law—making the contractor liable for the unpaid funds.
But Tocci left unanswered the question of whether a payor who innocently fails to comply with the act also loses its right to later argue that the payee is not entitled to the funds it seeks because, among other reasons, it performed defective work. These questions are also important to design professionals who, while performing construction phase services for an owner, may fail to strictly comply with the act’s requirements.
Massachusetts’ highest tribunal, the Supreme Judicial Court, answered that question this past June in Business Interiors Floor Covering Business Trust v. Graycor Construction Co. Inc., et.al.
In that case, project general contractor Graycor entered into a subcontract with Business Interiors Floor Covering Business Trust to perform certain flooring work for a movie theater project in Boston. During construction, Graycor failed to formally approve, reject or certify that its withholding of payment on three Business Interiors’ applications for payment was made in good faith. Business Interiors sued Graycor in Massachusetts Superior Court, alleging breach of contract, among other theories, and moved for summary judgment. It argued that Graycor failed to comply with the act and was thus liable for the unpaid invoices. The court agreed and entered separate and final judgment against Graycor for the amount owed.
Graycor appealed to the state’s highest appellate court, arguing that it had valid defenses supporting its failure to pay its subcontractor. Justice Scott L. Kafker, writing for the court majority, disagreed and held that pursuant to the act, “a party that neither approves nor rejects a payment application within the requisite time must first make the payment in order to pursue any defenses in a subsequent proceeding.” The court reasoned that a general contractor that fails to comply with the act or fails to make payment “prior to, or contemporaneous with” its assertion of any defenses to payment in a subsequent proceeding, waives its right to later argue that the subcontractor is not entitled to payment.
“To the extent the [contractor] has any viable contract or common[-]law defenses to payment, such defenses are still available for presentation in a subsequent forum,” the court said. But the contractor must first pay the funds purportedly owed.
The Business Interiors decision effectively sharpens the act’s teeth by establishing a “do or die” deadline for payors and their construction-phase consultants. Either comply with the act by timely advising and certifying reasons for withholding monies, or if you don’t, pay the amounts allegedly due before you are allowed to present any defenses in a subsequent adjudication.
While the Business Interiors dispute involved a general contractor-subcontractor relationship, the decision is nevertheless a warning to those construction professionals who are responsible for reviewing a general contractor’s payment requisitions on behalf of a project owner.
Thus, a failure to comply with the act could put a professional who reviews and approves payment on behalf of an owner on the hook for monies that owner will need to pay in exchange for the right to assert its defenses. That is an important risk that was never as clear as before.
Joseph A. Barra, Esq., a partner in Robinson & Cole LLP and an adjunct professor of construction law at Wentworth Institute of Technology, prepared an amicus brief on the case for the Associated Subcontractors of Massachusetts. He can be reached at jbarra@rc.com.
