Lawyers Journal

Massachusetts’ new Prompt Pay Act

The newly-enacted Massachusetts Prompt Pay Act (M.G.L. c. 149, sec. 29E) represents the most significant legislation to affect private construction in many years. Titled "An Act Promoting Fairness In Private Construction Contracts", the law is intended to improve the flow of funds to those who furnish and pay for the labor and materials in private construction.   Slow payment, particularly to subcontractors, has been a chronic problem in Massachusetts. Contractors and subcontractors often wait months for periodic progress payments while they struggle to make payrolls and maintain credit. Change orders for extra work can languish unsigned for many more months, precluding the contractor or subcontractor from even billing for the work performed, let alone receiving payment for it. But unfair contract provisions resulting from unequal bargaining power typically prevent any meaningful recourse. Consequently, contractors and subcontractors become the unwilling lenders financing the project.

The new law addresses this inequity by establishing outside deadlines for submission, approval or rejection, and payment of applications for periodic progress payments, and for submission and approval or rejection of change order requests; by allowing for prompt commencement of dispute resolution procedures for rejected payment applications and change order requests; by limiting the application of conditional payment terms ("pay-if-paid clauses"); and by restricting contractual terms requiring continued performance when amounts due are not paid.  It applies to prime contractors, subcontractors and suppliers who are entitled to file mechanic's liens under M.G.L c. 254 on projects where the prime contract has an original price of $3million or more. It does not apply to residential projects of 4 or fewer units, or where the prime contract was entered into before the effective date of the Act, November 8, 2010. 

Here's how the Prompt Pay Act works:

Payment Applications

Contracts and subcontracts must provide reasonable time periods within which periodic payment applications are submitted, approved or rejected, and paid. The parties are free to negotiate those time periods provided they're reasonable and don't exceed the prescribed limits.

The reasonable time period for submission of an application may not exceed 30 days. The cycle begins with the end of the first calendar month occurring at least 14 days after the applicant's commencement of work. Payments are based on actual progress, although milestones may still be a basis for payment if the time between applications doesn't exceed 30 days.

Once submitted, the reasonable time period for approval or rejection of an application may not exceed 15 days. But since the prime contractor must receive, review, and assemble applications from its subcontractors for inclusion in its own submission, the law allows the prime contractor an additional 7 days to approve or reject a subcontractor's application. Likewise, the law allows each tier below the prime contractor 7 days more than the tier above for approval or rejection of an application from the tier below.

The grounds for rejection are not prescribed by the law and remain subject to the parties' contract. However, to help ensure compliance and keep the process moving, any rejection, whether in whole or in part, must be in writing, explain the factual and contractual basis for the rejection, and be certified as made in good faith.

The treatment of an application for payment that's neither approved nor rejected within the specified time is the concept that effects significant change. Instead of remaining unprocessesed and unpaid by inaction, the application is "deemed" approved. To account for possible oversight or error, an application that was "deemed" approved may still be rejected up until the time payment is due, but the rejection must otherwise meet the statutory requirements for rejection.  Meanwhile, a "deemed" approved application advances in line toward payment.

Finally, regardless of whether approval was express or "deemed, the reasonable time period for payment of an application may not exceed 45 days after approval. Although this outside limit is probably more generous than many will negotiate, it curtails the usefulness of "pay when paid", the ubiquitous contract term which can indefinitely delay payment downstream until payment is received from upstream.

Change Orders

The law also requires contracts and subcontracts to provide reasonable time periods within which written requests for change orders increasing the contract price are approved or rejected.  The time period for approval or rejection of change orders may not exceed 30 days after submission of the request or commencement of the changed work, whichever is later. As with payment applications, the prime contractor, and each lower tier, is allowed 7 days longer than the tier above for approval or rejection of a change order request from the tier below. Requirements for submission and entitlement remain a matter of contract. Rejection may be in whole or in part, but here too it must be in writing, explain the factual and contractual basis for rejection, and be certified as made in good faith.

Here again, the consequence of inaction effects a dramatic change to business as usual. If a change order request is neither approved nor rejected within the specified time, it's likewise "deemed" approved, unless properly rejected before payment is due. And once approved, whether expressly or "deemed", the change order request may be submitted for payment with the next application for payment.  Considering the risk of being "caught in the middle", any recipient of a change order request will undoubtedly be more conscientious in properly and timely processing that request.

Disputes

Disputes over rejected payment applications or change order requests are inevitable, even under the new law. Prompt resolution of these disputes, however, has been thwarted by contract provisions which require the resolution of all disputes to await completion of the project. Consistent with the improvement to the flow of funds, the Prompt Pay Act directs that the rejection of a payment application or a change order request is subject to the applicable dispute resolution procedure, and any provision that requires a party to delay use of that procedure for more than 60 days is void and unenforceable.

Pay if Paid

Contract provisions that expressly condition any obligation to pay upon receipt of payment from a third party have long been considered onerous by subcontractors and lower tiers. Unlike "pay when paid" provisions, which delay but don't preclude eventual payment, "pay if paid" provisions shift the entire risk of non-payment to those who have no connection with the reason for non-payment and are usually least able to bear that risk. These provisions have been declared against public policy in a number of states, but until now, they've been upheld in Massachusetts.

The Prompt Payment Act declares "pay if paid" provisions void and unenforceable with only two exceptions. For the exceptions to apply, they must be clearly stated in the contract, and the party seeking to enforce the payment condition bears the burden of proof as to each element. If neither exception applies, the party otherwise obligated to pay must pay, regardless of whether it receives its own payment.

The first exception permits "pay if paid" where non-payment from the third party is due to a failure in performance by the party seeking payment. The party seeking to enforce the payment condition must have provided written notice of the deficiency, and the party seeking payment must have failed to cure within the time required by its contract, or in the absence of a contractual cure period, within 14 days after receipt of written notice.

The second exception applies where the third party fails to pay because it is insolvent or becomes insolvent within 90 days after submission of the application for payment. But in order to be excused from payment, the party seeking to enforce the payment condition must have taken specific measures to obtain security and minimize the risk of non-payment. The measures prescribed by the law are the filing of documents to obtain a mechanic's lien before submission of its first application for payment for on-site work, maintaining, perfecting and foreclosing on the lien, and pursuing all reasonable legal remedies to obtain payment until there's a reasonable likelihood further action will not result in obtaining payment. The party seeking payment may question or challenge the legal remedies taken to pursue payment from the third party, and if not satisfied, may file a summary proceeding in court for a judicial determination.

Suspension of Work

How long a contractor or subcontractor must continue to finance a project on which it's not being paid is also covered. Prior to the new law, contract provisions prohibiting suspension of work for any reason, or requiring unreasonably long notice and cure periods for non-payment, made stopping work a risky move. Now, any contract provision requiring a person to continue working if payment of an approved amount is not received within 30 days of when it's due, is void and unenforceable. There are two exceptions.

The first exception is when non-payment is due to a dispute over the quality or quantity of work. This would typically arise where defects or errors in quantity measurement appear after payment had been approved for apparently correct work or quantities. The second exception is when non-payment is due to a default occurring after approval of the payment. This would typically arise where the party seeking payment has defaulted in some other way, such as abandonment of the project, causing damages that fairly should be offset against the pending payment. For either exception to apply, the party seeking to prevent suspension must have given prior notice of the dispute or default, and paid all sums due less the amounts attributable to the dispute or default. 

Proponents of the new law hail it as a welcome step in changing the culture of an industry hard hit by the recession. Opponents claim it's an interference with their freedom of contract. But if it works as intended, and the practices of the better owners and contractors here and prevalent in other states become routine, the practical benefit to the entire industry will far outweigh the academic criticism. Either way, it's the law. And to make sure of that, the Prompt Pay Act also provides that any contract provision which purports to waive or limit the terms of the law is void and unenforceable.

David E. Wilson is a partner with Corwin & Corwin LLP, with whom he has practiced construction law for 27 years. Mr. Wilson is the author of the bill that became the Prompt Pay Act, as well as a principal author of the Mechanic's Lien Law revisions of 1996.

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