On November 8, 2010, the new Massachusetts Prompt Pay Act which will go into effect. This statute will radically alter the contracting landscape for all tiers working on construction projects where the prime contract exceeds $3 million and the project is other than for work on residential projects involving 1-4 dwelling units. It also does not apply to projects for which one cannot lien, i.e. public projects. The statute deals primarily with four issues: prompt approval of payment requisitions and payment, change orders; pay-when-paid clauses; and withholding payment after approval. A summary of the salient parts of the new Act follows:
Payment Terms — The period between payment applications cannot exceed thirty (30) days, and they must be approved or rejected within fifteen (15) days of submission (though each successive lower tier can have an additional seven (7) days). The statute makes no exceptions for billings based on milestones or component completion — payment applications cannot be spaced out greater than thirty days irrespective of the reason. Thus, billing based on milestones would only be acceptable if the period between milestones does not exceed thirty (30) days. If not approved or rejected within the specified time period, payment applications will be deemed conditionally approved. Payment is due forty-five (45) days after approval. If you miss the rejection period and are faced with a conditionally approved application, there is an opportunity to rescind the conditional approval by rejecting prior to the date payment is due. Rejections must be in writing, must specify the reason for the rejection, and be certified as having been made in good faith.
A rejection will be subject to the dispute resolution procedures in the contract (if any), but any attempt to require the disputing party to wait more than sixty (60) days before it can invoke the dispute resolution procedure, i.e. requiring that it work under protest until the end of the job, is unenforceable and void.
Change Orders — A request for a change order must be approved or rejected within thirty (30) days after commencement of the changed work or the submission of the proposed change order, whichever is later. Lower tier contractors can get an additional seven (7) days beyond the tier above them. This means that the statute recognizes that change order work often starts even before the formal change order paperwork is executed. The failure to timely approve a change order, as with the payment applications, will result in a conditional approval, subject to rescinding rejection at any time prior to the payment due date. As with disputed payment applications, you cannot require the contractor to wait until the end of the project to address a dispute over a change order. The outside date for delaying disputes over rejected change orders is sixty (60) days.
Pay-If-Paid Clauses — These are now void, with only two exceptions: 1) if the failure of payment is due to defects in the work of the person claiming the payment, and the claimant fails to cure after receipt of written notice of the defect. (If the contract does not specify a cure period, the default cure period is fourteen (14) days after receipt of the notice); or 2) if the person owing the money (i.e. the party upon whom payment is conditioned) is insolvent or becomes insolvent within ninety (90) days after submission of the payment requisition, provided, however, that the person seeking to enforce the condition a) files a Notice of Contract under the lien law, or for those who do not have a contract with the prime contractor (i.e. lower tier contractors) has sent a Notice of Identification under the lien law, prior to the date of the first payment requisition; b) takes the remaining steps necessary to perfect a lien, including filing suit, within the time periods required under the lien law; and c) "pursues all reasonable legal remedies to obtain payment from the person with whom the person had a direct contract unless and until there is a reasonable likelihood the action shall not result in obtaining payment." The contract must set forth these two exceptions in the pay-if-paid clause itself. A party wishing to challenge whether "all legal remedies" have been pursued, can avail itself of the summary disposition procedure contained in the lien statute, provided that a demand for a written statement of all efforts undertaken is made and either 1) no response is obtained within ten (10) days; or 2) having received a response, the party seeking payment has requested the other party to pursue specific additional legal remedies and that party fails to do so.
Functionally, this all but does away with pay-if-paid clauses in Massachusetts unless the reason for non-payment relates to the performance of the party seeking payment. The insolvency exception seems extremely cumbersome and unlikely to be a viable alternative unless there is sufficient money involved and administrative oversight to make it worthwhile.
Withholding Payment After Approval — Any clause which requires a party to proceed with work even if an approved payment has not been made within thirty (30) days after its due date, is void and unenforceable unless 1) there is a dispute over the quality and quantity of the construction so furnished; or 2) there had been a default after the approval and receipt by the defaulting party of a good faith notice of default and payment of all sums not attributable to the default has been made.
The Prompt Pay Act significantly alters the contracting landscape and provides greater protections for construction contractors. Both contractors and owners must be aware of its implications, and revise their standard contracts to ensure that they comply with the new requirements.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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