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.