Tocci Bldg. Corp. v. IRIV Partners, LLC, 101 Mass. App. Ct. 133 (2022)

For the first time, the Appeals Court of Massachusetts has construed the Massachusetts Prompt Payment Act (the statute), requiring strict compliance on the part of owners and contractors who wish to withhold payments from contractors or subcontractors.

In Tocci Building Corporation v. IRIV Partners, LLC, Contractor Tocci sued defendant-owner IRIV Partners, claiming that IRIV violated the statute by making no payments, or only partial payments, on seven periodic applications for payment submitted by Tocci over the course of a project in South Boston.

The statute applies to private contracts for construction valued at $3 million or more and was enacted to reduce the risk of nonpayment to contractors and subcontractors by ensuring that prompt payment occurs on a regular basis during the course of a construction project. See Mass. Gen. Laws Ann. Ch. 149, § 29E (West).

The contract at issue in Tocci complied with the provision of the statute requiring that contracts for construction provide reasonable time periods for: (1) the submission of periodic payment applications (30 days from the end of each month), (2) the review and approval or rejection of those payment applications (not more than 15 days after submission), and (3) payment upon approved applications (not more than 45 days after approval).

However, the statute also requires that for a rejection to be effective, it must be made in writing, include an explanation of the factual and contractual basis for the rejection, and include a certification that the rejection is made in good faith. If not properly rejected within 15 days of submission (or shorter time period provided in the contract), the application will be deemed approved.

Tocci claimed that IRIV failed to follow these rejection requirements, and the court agreed. While IRIV had written letters to Tocci during the project complaining of defective and incomplete work, the letters failed to specifically invoke the right to withhold payment, failed to explain the contractual basis for withholding payment, and failed to include a certification that the withholdings were made in good faith. As a result, the court determined that all seven payment applications were deemed approved, and that IRIV violated the statute by failing to make prompt and complete payments thereon.

A key holding of the court is that the statute’s certification requirement is not merely ministerial. Instead, the court said that the certification requirement:

… ensures not only that the Owner be deliberate about rejecting applications for periodic progress payments, and that it takes care to reject them only in good faith, its presence on a communication also provides a clear indication to the contractor that an application has been rejected, so that the contractor can know both that some response is needed and that time periods have been triggered for invoking what remedies are available.

Notably, for purposes of its opinion, the court assumed that IRIV’s allegations of defective and incomplete work were true, and that the owner had good reason not to pay. Nevertheless, in the absence of a proper rejection of Tocci’s payment applications, the owner was required to make payments to Tocci and pursue recoupment of those amounts via its still-pending counterclaims in the litigation. A separate judgment was appropriate, according to the court, because to allow IRIV to continue holding the money to the conclusion of the litigation would “eviscerate the scheme for prompt payment or rejection-and-resolution created by the Legislature.”

In sum, project owners and general contractors wishing to withhold payments to contractors and subcontractors on projects in Massachusetts should issue carefully crafted written rejections within 15 days of receipt of a payment application. The rejection must clearly state it is a rejection, provide a legal and factual basis for the rejection, and contain a certification that the rejection is made in good faith.