By: Christopher W. Morog, Alexandra A. Gordon and Robert T. Ferguson, Jr.

As many of you are already aware, the Massachusetts Appeals Court recently confirmed that Massachusetts courts will strictly enforce the payment and rejection requirements of the Massachusetts Prompt Pay Act (“PPA”) applicable to private projects with a prime contract value of $3 Million or more. If the project falls within the scope of the PPA, then the requirements of the statute apply not only to the prime contract, but also to subcontracts and sub-subcontracts. Contract terms that conflict with the PPA are deemed to be void and unenforceable.

Generally speaking, the PPA sets strict time limitations for the submission, approval/rejection, and payment of: (1) written applications for periodic progress payments; and (2) written requests seeking an increase in the contract price. In order to reject (in whole or in part) an application for payment or a request for an increase in the contract price, a contracting party must make the rejection in writing, provide the factual and contractual bases for the rejection, and certify that the rejection is made in good faith. Contracting parties that fail to comply with the statutory requirements run the risk that a given application for payment or request for an increase in the contract price may be deemed to have been approved.

The Appeals Court addressed the requirements of the PPA in Tocci Building Corp. v. IRIV Partners, LLC, et al. In that case, the project owner attempted to reject requisitions, but did not certify that the rejections were made in good faith. The Appeals Court confirmed that even the most detailed rejection, supported by undisputed facts and references to contractual deficiencies, must contain a certification that the rejection has been made in good faith to be effective and excuse non-payment of the requisition. Failure to properly reject a requisition within the time allotted by the PPA results in a requisition that is “deemed approved” and therefore must be paid.

However the owner or contractor who makes payment on a requisition that has been “deemed approved” has not waived its right to recoup money which was paid in response to a “deemed approved” requisition, but which could have been rejected. As the Appeals Court summarized: “What the statute prohibits, though, is withholding a periodic payment in response to an application for it without issuing a timely rejection that complies with the statutory requirements.” Therefore, if an owner or contractor does not reject a requisition in the time permitted by the PPA, then the owner or contractor must make payment and seek to affirmatively recoup those payments at a later time, possibly by instituting litigation.

The Appeals Court left open several unanswered questions, including the following:

1. May a contractor or owner withhold money from a subsequent requisition to recoup money paid on a requisition that was “deemed approved”?
2. Does an owner or contractor who fails to either reject or make payment on a requisition that was “deemed approved” waive its defenses to that unmade payment?

As to the second unanswered question, the Appeals Court initially opined that owners and contractors who fail to include certain contractual or factual consideration in a rejection have not waived their right to assert them in a subsequent litigation, suggesting that payment on the “deemed approved” requisition was not relevant to waiver. In an unusual move, the Court subsequently narrowed its statement to apply only to those owners or contractors who make payment on a requisition that was not otherwise rejected. As a result, the issue of waiver in the case of non-payment remains open.