Massachusetts Courts Continue Strict Enforcement of Prompt Pay Requirements: Lessons for Construction Industry Participants Nationwide

Recent Massachusetts decisions provide an important reminder that prompt pay statutes are often enforced strictly, and seemingly minor deficiencies in payment-rejection notices can have significant financial consequences. Under the Massachusetts Prompt Pay Act (“PPA”), a contractor’s payment application may be deemed approved if the party reviewing it fails to issue a timely rejection that satisfies all statutory requirements. Once an application is deemed approved, payment may be required even where legitimate disputes exist regarding the work, potentially forcing parties to “pay now and litigate later.”

Three recent decisions—J.C. Cannistraro, LLC v. Columbia Construction Co., Tocci Building Corp. v. IRIV Partners, LLC and Business Interiors Floor Covering Business Trust v. Graycor Construction Co.—highlight the importance of strict compliance with the PPA and offer valuable lessons for owners, developers, contractors and construction managers throughout the country. Although prompt pay statutes vary by jurisdiction, many states impose similar notice and timing requirements that can create substantial risk if not followed carefully.

Strict Compliance Means Strict Compliance

Massachusetts courts have repeatedly emphasized that the requirements of the PPA are not mere technicalities. To effectively reject a payment application, the rejection must:

• Be issued within the applicable statutory deadline.
• Be in writing.
• State the factual basis for the rejection.
• State the contractual basis for the rejection.
• Include an express certification that the rejection is made in good faith.

In Tocci Building Corp. v. IRIV Partners, LLC, the court made clear that the good-faith certification requirement is a substantive statutory requirement—not a ministerial formality. As a result, a rejection notice that omits the required certification may be ineffective even if it otherwise explains the reasons payment is being withheld. In that circumstance, the payment application may be deemed approved and become payable under the statute.

The more recent Cannistraro decision reinforces this strict approach. Together, these cases demonstrate that courts may not excuse noncompliance simply because a party substantially complied with the statute or had legitimate grounds for disputing payment. If the statutory requirements are not satisfied, the consequences can be severe.

The Risk of Having to “Pay First, Fight Later”

The consequences of a deficient rejection notice can extend beyond the loss of procedural defenses. In Business Interiors Floor Covering Business Trust v. Graycor Construction Co., the court recognized that common-law claims, offsets and other defenses may still exist notwithstanding a violation of the PPA. However, the decision also makes clear that once a payment application has been deemed approved, the party withholding payment may be required to satisfy its payment obligations before effectively pursuing those defenses in court.

As a practical matter, this can create significant leverage for the party seeking payment. Even where the paying party ultimately believes it has strong claims or defenses, it may be required to make payment first and then pursue those claims through litigation or other dispute-resolution procedures. The resulting cash-flow impact can be substantial on large construction projects.

Practical Steps to Reduce Risk

These decisions underscore the importance of implementing procedures designed to ensure compliance with prompt pay requirements.

Owners, developers, contractors and construction managers should consider.

• Reviewing and updating payment-rejection and change-order response forms.
• Including an express good-faith certification in all rejection notices where required.
• Implementing reliable calendaring systems to track statutory response deadlines.
• Training project managers, contract administrators, and accounting personnel on prompt pay requirements.
• Establishing procedures to ensure that all rejection notices identify both the factual and contractual basis for withholding payment.
• Periodically reviewing applicable prompt pay laws in the jurisdictions where they operate.

Organizations operating in multiple states should be particularly mindful that prompt pay statutes differ from jurisdiction to jurisdiction. While the specific requirements may vary, the Massachusetts decisions serve as a reminder that courts increasingly expect strict adherence to statutory notice and payment procedures. Businesses should avoid assuming that substantial compliance will be sufficient.

Takeaway

These recent Massachusetts cases reinforce a straightforward but important lesson: when responding to payment applications or requests for change-order compensation, details matter. A missed deadline, an incomplete explanation or the omission of a required certification can transform a disputed payment request into an immediately enforceable obligation. Companies involved in construction projects should review their internal processes now to reduce the risk of an avoidable and potentially costly prompt pay violation.

The attorneys in the Construction Contracts and Risk Management Group at Cohen Seglias can help by drafting rejection forms, researching the law in your jurisdiction and training your project management and accounting staff to avoid the harsh repercussions if a deficiency notice is not sent in a timely manner.  For additional information, please contact John Greenhall (267.238.4704) or Lisa Wampler (412.227.5948).