By: Shawn R. Farrell
Most states have some form of Prompt Pay Act (PPA) for private and/or public jobs, and the language within these PPAs often mirror each other. The purpose of such PPA laws is to legislatively guarantee timely payment to general contractors and subcontractors.
The problem with most PPAs has nothing to do with the law but with the courts. Courts have not provided clear guidance on how the PPA should impact the contractual relationship between the parties. In November 2020, a Massachusetts court gave us that missing guidance about a PPA, on the duty of when an owner must raise an objection to a contractor’s monthly progress payment applications. In Tocci Building Corp v. IRIV Partners, LLC; Boston Harbor Industrial Development, LLC and Hudson Ins. Co., the court tells us what a PPA means when it requires an owner to object to an invoice, or it will be “deemed approved.”
Simply put, “deemed approved” means that the owner owes the money. The owner does not get the right to make up a defense after being sued. If the owner did not contemporaneously speak up and inform the contractor why the full payment was not made, the money is owed. This decision provides the missing statutory “teeth” to fulfill the purpose of the PPA –pay a contractor on time or suffer the consequences. Contractors outside of Massachusetts will be well served to educate their courts of this decision and demand the reasoning of the court be followed.
Here are the relevant facts of Tocci:
- The Prime Contract required payment within 30 days after the contractor submitted its monthly payment application.
- The PPA required approval or rejection of the payment application within 15 days of receipt and payment 45 days after approval.
- The PPA stated: “An application for periodic progress payment which is neither approved nor rejected within the time period shall be ‘deemed approved’ unless it is rejected before the date of payment is due.”
- Tocci submitted seven monthly payment applications that totaled $4,600,109.24.
- Defendants made no monthly objections to the payment applications but filed an answer to the complaint alleging Tocci breached the contract, made negligent misrepresentations, and committed fraud.
In a motion for summary judgment, the court separated all allegations of negligence and fraud from the claims for payment of contract balances. As to Tocci’s claims related to contract balances, the court held that the PPA “demands prompt payment, absent a timely and adequate objection.” Because the owner did not comply with the requirements of the PPA for “directs payment,” the court entered an order for the full amount of monthly progress payments of $4,600,109. The remaining claims of the owner were left for trial but could not be used to conflate defenses and circumvent the PPA.
The holding in Tocci represents a formidable weapon against owners and levels the playing field if not tipping the scales of power in favor of the contractor. No longer can an owner hold money on progress payments and roll those payment disputes up into a later battle over project completion or closeout project issues. It is not atypical for an owner to force the contractor to weigh the opportunity costs of battling out pending change orders and project punch list items (that cost the contractor additional monies) against cash flow needs
associated with monthly progress payments (like the payment to subcontractors and suppliers).
This holding prevents the owner from unilaterally imposing “economic duress” on the contractor, forcing the contractor at the end of the project to capitulate to a renegotiation of the contract price or performance of extra work (disputed change orders), to close out work the project and obtain payment for work performed months earlier.
The PPAs in other states—for example, New Jersey—have similar language as the statute in Massachusetts, “deeming and invoice as approved,” if the timely objection of the owner is with-held. While the state court opinion of Massachusetts would not act as stare decisis and, therefore, bind courts to follow the ruling, this well-reasoned, 16-page opinion is compelling. Any contractor that has a similar language in their PPA but lacks a court’s definition of “deemed approved” should be armed with this decision. A court outside Massachusetts should follow the reasoning of Tocci or explain why the same language can have a different meaning based on geography.
Uniformity of judicial decisions across the country serves the best interests of the utility construction industry. Sir Francis Bacon is attributed as coining the metaphor “knowledge is power.” We can make this decision available for any NUCA member and if you are aware of a similar trial court decision, we urge you to share it with your chapter members. Sharing this knowledge will empower the membership and continue the goals of NUCA National.