Massachusetts construction companies have long been required to comply with statutory payment requirements on public construction projects and with detailed procedural rules to establish mechanics lien on private projects. Until recently, however, contractors and subcontractors on private projects were allowed to freely negotiate payment terms and related provisions in their contracts. The Massachusetts Prompt Payment Act, M.G.L. c. 149, §29E, changes all of that, making fundamental changes in the law relating to contractual payment terms on private projects.

The Act was signed by Governor Patrick on August 10, 2010 and takes effect on November 8, 2010. The product of years of extensive lobbying by Massachusetts subcontractors, the Act is part of a national trend toward regulating payments on private construction contracts, in which 34 states have adopted statutes containing variations on some or all of the provisions of the Act.

The Act will have an immediate effect on owners, contractors, and subcontractors, by establishing mandatory requirements for submission, review and payment of requisitions and change orders, by prohibiting most uses of “pay-when-paid” provisions and by otherwise changing accepted contractual provisions relating to suspensions for non-payment and dispute resolution procedures. The Act shifts much of the risk of owner non-payment from subcontractors to prime contractors, and will require revisions of form contracts and subcontracts as well as alterations in long-standing payment practices.

APPLICABILITY AND SUMMARY OF THE ACT

The new law applies to all private projects with prime contracts entered into on or after November 8, 2010 where the prime contracts have original values of $3 million or more, with the exception of residential projects containing 4 or fewer dwelling units. Projects with prime contracts executed before that date, projects with original values less than $3 million and small, residential projects are not affected. On the covered projects, the law applies to any party who would be entitled to a Massachusetts mechanics lien: prime contractors and first and second tier subcontractors and suppliers. For those contracts, the Act establishes 5 basic requirements, which can be summarized as follows:

1. PERIODIC PAYMENTS: mandatory maximum time periods for submission, review and payment of periodic requisitions, with written statements of reasons for any rejection or reduction of requisition;
2. CHANGE ORDERS: mandatory maximum time periods for review, approval and payment for change order work, with written statements of reasons for any rejection or reduction of requisition;
3. PAY-IF-PAID: prohibited except in 2 limited circumstances;
4. DISPUTE RESOLUTION: allowed 60 days after rejection of requisition or change order; and
5. FORCED CONTINUATION OF WORK: limited to 30 days after failure to make undisputed payment. These provisions are described in more detail below.

PAYMENT REQUISITIONS

The Act requires that payment applications be submitted on a cycle of no more than 30 days. The requisition then must be either approved or rejected within 15 days of submission, although that period is extended by 7 days for each tier below the prime contract. Any full or partial rejection of a requisition must be made in writing, must explain the factual and contractual basis for the rejection and must include a certification that the rejection is made in good faith. If there is no such written rejection within the applicable time period, the requisition is “deemed to be approved.” Payment must be then made within 45 days after approval, but a “deemed approval” can be reversed if, before the 45 days runs out, a written rejection complying with the above requirements is issued.

CHANGE ORDER REQUESTS

The Act requires payment or rejection of change order requests within 30 days of either submission of the request or commencement of the extra work, whichever is later. As with requisitions, that 30 day period is extended by 7 days for each tier below the prime contract and a failure to respond within that time period is deemed an approval. In addition, as with requisitions, a rejection must be accompanied by an explanation and good-faith certification. Upon approval, a change order may then be included with the next payment application without waiting for issuance of a formal change order.

LIMITATION OF PAY-IF-PAID CLAUSES

Perhaps the most important change made by the new law is the severe limitation of conditional payment provisions, sometimes known as “pay-if-paid” clauses. Pay-if-paid clauses, of course, have been an accepted part of construction in Massachusetts for many years. Under the Act, pay-if-paid clauses are generally unenforceable, subject to two narrow exceptions, neither of which apply unless expressly set forth in the contract. The first exception allows nonpayment as a result of a performance failure by the person seeking payment, after notice and an opportunity to cure. That “exception,” however, does not substantially change the law, since nonperformance always allows non-payment, regardless of pay-if-paid clauses. The second exception allows non-payment if the “up-stream” payor is “insolvent,” as defined in the statute. Even in the case of an insolvency, however, the right to withhold payment is not absolute – the person seeking to enforce the pay-if-paid clause can only do so if it (a) files preliminary mechanics lien documents before submitting its first payment requisition and (b) pursues the lien claim and all other reasonable legal remedies against the insolvent party. Because many contractors and subcontractors will not, for business relationship purposes, file for a mechanics lien before monies are due, this latter exception is not likely to be frequently used.

DISPUTES

The Act provides that if a payment requisition or change order request is rejected, the contractor or subcontractor seeking payment is entitled to commence contractual dispute resolution – whether arbitration, litigation or any other procedure – within 60 days after rejection. The accepted provisions of many contracts which require parties to hold their disputes until work is complete are now unenforceable.

SUSPENSION OF WORK

The Act provides that a contractor or subcontractor can suspend work after 30 days of non-payment unless (a) the nonpayment arises from a dispute regarding quality or quantity of the work or (b) there is a default by the party seeking payment, after a payment becomes due, and the default allows the overdue payment to be eliminated or reduced, provided that the party required to make payment provides written notice of default and pays any undisputed balance.