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.

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.

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 (7) 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 contractors 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.

If you have any questions as to how to frame payment provisions in a construction contract to include an informal, pre-submission process, or about responding to a payment application, do not hesitate to contact us.