Massachusetts has long required prompt payment of contractors and subcontractors on public projects. State agencies must make payment to prime contractors within certain time limits, and prime contractors must pay subcontractors and suppliers promptly upon receipt of payment from the state agency. Until recently, contractors and subcontractors on private projects did not have similar protections; payment terms were left to the parties to negotiate in their contracts, and enforcement was provided by mechanic’s liens and breach-of-contract lawsuits.
Many other states have Prompt Payment Acts covering private projects, and the current recession has led to a nationwide trend toward adoption of such laws. Massachusetts became the latest to join the trend on August 10, when Governor Patrick signed a new Prompt Payment Act, M.G.L. c. 149, §29E. The Act represents a major shift in the law of private construction contracts in Massachusetts, and will have an immediate effect on owners, contractors, and subcontractors.
APPLICATION OF THE ACT
The new law applies to all private projects of $3 million or more, with the exception of small-scale residential projects (four or fewer units). The law becomes effective on November 7, 2010 (90 days after the Governor’s signature), and applies to projects on which the prime contract is entered into after that date. Existing projects are not affected.
PAYMENT OF PERIODIC REQUISITIONS
The prompt payment law 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 this period may be extended by 7 days for each tier below the prime contract). Any rejection of a requisition has to be in writing, has to explain the basis for the rejection, and has to include a certification that the rejection is made in good faith. If there is no written rejection meeting within the required 15-day period, the requisition is “deemed to be approved.” Payment must be made within 45 days after approval or “deemed” approval.
PAYMENT OF CHANGE ORDER REQUESTS
The law 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 payment requisitions, a failure to respond within that time period is deemed approved, and rejection must be accompanied by an explanation and a good-faith certification.
LIMITATION OF PAY-IF-PAID CLAUSES
Perhaps the most important change made by the new law is the severe limitation of conditional payment provisions (“pay-if-paid” clauses), which have been a fact of life in Massachusetts for many years. Under the prompt payment law, pay-if-paid clauses are generally banned and unenforceable. There are two important exceptions to the ban, both of which only apply if expressly set forth in the contract or subcontract. The first exception allows nonpayment downstream if the nonpayment was occasioned by the performance failure (after notice and opportunity to cure) of the person seeking payment. The second exception allows non-payment if the upstream payor is insolvent. However, even in the case of an owner or contractor insolvency, the right to withhold payment is not absolute; the person seeking to enforce the pay-ifpaid clause can only do so if it filed a Notice of Contract prior to the first payment requisition, and must pursue the lien claim and all other reasonable legal remedies against the insolvent upstream party.
DISPUTES
If a payment requisition or change order request is rejected, the contractor or subcontractor seeking payment is entitled to avail itself of whatever dispute resolution procedure (arbitration, litigation, etc.) is set forth in the contract. Contract provisions requiring that dispute resolution await the completion of the contract are invalid; the party seeking payment must have access to the dispute resolution mechanism within 60 days after rejection. Contracts also can no longer require a contractor or subcontractor to continue performing if an approved payment has been outstanding for more than 30 days, unless there is an uncured default or a dispute over construction quality or quantity.
The prompt payment law makes fundamental changes in the law relating to contractual payment terms on private projects. It shifts much of the risk of owner non-payment from subcontractors to prime contractors. These changes will require revision of form contracts and subcontracts, as well as alterations in long-standing standard payment practices.