August 23, 2024
By: Sara P. Bryant, Andrew G. Wailgum, and Lindsey M. McComber
Earlier this summer, Massachusetts’ highest Court interpreted the Massachusetts Prompt Payment Act (the PPA or the Act) for the first time in Business Interiors Floor Covering Business Trust v. Graycor Construction Company Inc., et al., No. SJC-13507 (Mass. Jun. 17, 2024). The Supreme Judicial Court (SJC) held that applications for payment that are not rejected in accordance with the Act, and are therefore deemed approved under the Act, must be paid before defenses can be raised by the paying party.
The PPA provides that if a request for payment is not properly rejected within 15 days, it is deemed approved. Such a rejection must (1) be in writing; (2) include the factual and contractual bases for the rejection; and (3) be certified in good faith. In this case, Graycor Construction Company Inc. (Graycor) was the general contractor for a movie theater project, and it subcontracted the flooring work to Business Interiors Floor Covering Business Trust (Business Interiors). Graycor failed to timely and properly reject three separate applications for payment submitted by Business Interiors and failed to pay Business Interiors for those applications. Business Interiors then sued Graycor for payment. In the Superior Court case, Business Interiors moved for summary judgment arguing that, based on the undisputed facts, it was entitled to payment from Graycor for the deemed approved pay applications. The Superior Court agreed with Business Interiors and granted its motion. (The Superior Court also issued a separate and final judgment, which allowed for the appeal.) Graycor appealed, and the SJC took this case from the Appeals Court so that it could decide it.
Pay Now and Fight to Recoup Later
In its appeal, Graycor argued that it should not have to pay the applications for payment because it had a defense to Business Interiors’ claims of nonpayment. More specifically, Graycor claimed it had a valid defense of impossibility. The SJC held that while a party may still assert common law defenses, such as impossibility, even though it failed to timely reject an application for payment as required by the Act, it must first pay the application that was deemed approved. Therefore, the paying party must pay the disputed amounts first, and then seek to recover those same funds from the party it paid. Here, Graycor should have paid the three disputed applications and then raised its defenses in the litigation and sought to recover the money it paid out. The SJC was clear in stating that payment of overdue approved invoices “must be made prior to, or contemporaneous with, raising common-law defenses, or the defenses cannot be raised.” Graycor never paid the disputed invoices and, therefore, waived any defenses it may have had.
A "Contract for Construction" Under the Act
On appeal, Graycor also disputed whether the Act even applied in this situation. If the contract at issue was not a “contract for construction” within the meaning of the Act, then Graycor argued it could have no liability under the Act. The Act states that “contracts for construction” are contracts “for which a lien may be established under G.L. c. 254, § 2 or 4.” G. L. c. 149, §29E(a). Graycor attempted to argue that this was not a “contract for construction” because its lien rights had been extinguished when the Project owner’s lease was terminated. However, the SJC interpreted the PPA broadly, holding that the Act’s definitional language was intended to describe a “very wide range of construction contracts for which liens may be created.” In rejecting Graycor’s argument, the Court succinctly held that the contract at issue was the type of construction contract for which a lien may have been established, and the fact that the lien had been dissolved was not relevant.
No More Separate and Final Judgments
Lastly, the Court also vacated the separate and final judgment issued by the Superior Court under Mass. R. Civ. P. 54(b) and overturned the analysis applied by the Appeals Court in Tocci Building Corporation v. IRIV Partners, LLC, 101 Mass. App. Ct. 133 (2022). In doing so, the Court found that nothing in the PPA indicates that the Legislature intended the Act to provide for immediate appeals of the failure to accept or reject periodic payment. Thus, the Court held that the traditional Rule 54(b) requirements should apply in these cases, and an appeal regarding a preliminary decision in a case regarding whether a pay application was approved or rejected must wait until the case has run its course.
Takeaways
The main takeaway from this decision is that owners, contractors and subcontractors must timely and properly reject applications for payment. If they fail to do so, not only will the pay application be deemed approved, the pay applicant will automatically be entitled to receive payment. While the paying party can still raise defenses that could result in the return of some or all of the money paid, it must have paid the disputed applications before or at about the same time that it raises its defenses.
It must be noted that the SJC’s decision leaves some unanswered questions regarding the application of the PPA in instances where a pay application is not paid and is deemed approved. For instance, how are “common law defenses” defined, and can other defenses, such as contractual defenses, be raised as well? Although the SJC did provide some level of clarity regarding the application of the PPA, as is often the case with court decisions, new questions have been raised and will likely have to be litigated in the future.
If you have any questions about this alert, please contact Andrew G. Wailgum at awailgum@murthalaw.com or 617.457.4006; Sara P. Bryant at sbryant@murthalaw.com or 617.457.4048; and Lindsey M. McComber at lmccomber@murthalaw.com or 617.457.4065.
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