Massachusetts High Court Issues Important Ruling Impacting Prompt Pay Act

Earlier today, the Massachusetts Supreme Judicial Court issued an order in the matter of Business Interiors Floor Covering Business Trust v. Graycor Construction Co. Inc. This decision presents the high court’s first ruling clarifying the application of Massachusetts’s Prompt Pay Act. The Court’s decision diverges from the approach used by lower courts and addresses several topics related to the Act.

Executive Summary

Under the Court’s ruling, a party who does not timely respond to payment applications on Prompt Pay projects waives their right to withhold payments and must pay the claimed amounts before asserting any defenses in a formal proceeding or the defenses will likely be waived.  If a court finds a Prompt Pay violation, it will not necessarily issue a “separate and final judgment,” as the appellate court chose to do in the Tocci case, but will instead consider the claim in the context of all other claims, cross claims, and counterclaims.

Background

In Business Interiors, the Court examined a case in which Graycor Construction Company Inc. (“Graycor”) served as general contractor for a movie theater project in Boston’s North End. Graycor then signed a subcontract with Business Interiors Floor Covering Business Trust (“Business Interiors”). Graycor failed to either approve or reject three of Business Interiors’ payment applications.

The Prompt Pay Act imposes strict time limits on the review and rejection of applications, requiring that if the payor does not properly approve or reject applications within the Act’s time limits, the application is “deemed to be approved.” Accordingly, where Graycor had not rejected the applications and failed to pay the invoices, Business Interiors filed suit.

Court’s Rulings

Graycor raised a variety of defenses, leading the Court to rule on several issues and bring clarity to how the Prompt Pay Act applies:

1. Defenses Are Waived Until Payment Is Made. Failure to reject a payment application in a timely manner does not waive the payor’s defenses; however, the payor cannot pursue any defenses in a subsequent proceeding until the invoices are paid. A party that fails to pay the invoices “deemed approved” may not raise its defenses.
2. Defenses Are Likely Waived if Raised in Formal Proceedings Before Payment Is Made. The decision states in a footnote that a “claim is preserved as long as the invoice is paid no later than when the defense is first presented in such a proceeding.” Accordingly, a defendant that seeks to defend its position without first paying the disputed claim may be deemed to have waived its defenses.
3. Separate and Final Judgment Is Not Automatic. The Court rejected the approach used by the Tocci court and held that the fact that payment withheld in violation of the Act does not, alone, merit separate and final judgment. Rather, claims, crossclaims, and counterclaims must be carefully examined together.  The Court indicated (but did not expressly rule) that separate and final judgment would be unlikely where counterclaims exist.
4. The Act Applies to Contracts for which a Lien May Be Established but Does Not Actually Require the Applicant to Perfect the Lien. The Court rejected Graycor’s argument that the contract at issue was not a “Contract for Construction” under the Act based on Graycor’s claim that the lien would have been dissolved before the action was commenced. The Court held that the normal rule that liens require strict compliance does not apply in this context and that the Prompt Pay Act applies to “a very wide range of construction contracts for which liens may be created.”

Practical Implications

This decision provides clarity on how the Prompt Pay Act will be applied and may incentivize contractors and subcontractors who have not been paid to pursue quicker legal action to force the payor to decide whether to risk permanently waiving its defenses. Defendants that withheld payment based on a theory of offset but failed to properly reject an application will need to be very careful in how they present their offset to avoid the defense being waived as described above.

Preti Flaherty conducted a webinar on the Prompt Pay Act last week – handouts from this program are available upon request. We will be providing an update shortly to address this new decision. For further information, please contact Ken Rubinstein at [email protected] or Nicholas Dube at [email protected].