In Massachusetts, the Prompt Pay Act provides protections to subcontractors who perform work pursuant to certain construction contracts. Under the Act, contractors are required to approve or reject payment applications by subcontractors within specified time limits or the applications are deemed to be approved. The Act applies to construction contracts for which a lien may be established that have an original contract price of $3,000,000 or more.
In a case of first impression, Business Interiors Floor Covering Business Trust v. Graycor Construction Company, Inc., the Massachusetts Supreme Judicial Court clarified the implementation of the Prompt Pay Act. In so doing, the Court held that (1) the Act applies to contracts for which a lien may have been applied at the time the contract was entered into; (2) failure to reject a payment within the statutory time period does not constitute an automatic waiver of any defenses a contractor may have to a claim for payment; (3) a contractor who fails to reject a payment application within the statutory time, however, must make payment to the subcontractor before or contemporaneous with any defenses it wishes to raise or it waives those defenses; and (4) Prompt Pay Act claims are not subject to a truncated “final judgment” analysis.
In Business Interiors, Graycor served as a contractor on a movie theater construction project in Boston. Graycor hired Business Interiors as a subcontractor. During the course of the project, Business Interiors submitted three payment applications that Graycor neither approved nor rejected within the statutory time period. Business Interiors filed suit, alleging breach of the Act, as well as several other causes of action. In the trial court, Business Interiors moved for summary judgment, which the trial judge granted on grounds that Graycor had waived any defenses to claim for payment when it failed to reject the payment applications within the required time period. The trial court also entered separate and final judgment on the Prompt Pay Act claims, notwithstanding the existence of additional claims to be resolved, using a truncated analysis from an earlier appellate case, Tocci Building Corp. v. IRIV Partners, LLC. Graycor appealed, which the Supreme Judicial Court, on its own initiative, transferred from the Appeals Court.
Graycor asserted several arguments on appeal. First, Graycor argued that the Prompt Pay Act did not apply because the at-issue subcontract was not eligible for a lien. The owner of the movie theater project was not the owner of the at-issue real estate, but rather a tenant. By the time Business Interiors filed its lawsuit, the lease between the property owner and the project owner had been terminated, so no lien could have been established. Graycor argued that this meant that the Act did not apply. The Court disagreed, explaining that the relevant question was whether a lien could have been established at the time the contract was entered into. If so, the Court held, then the contract was subject to the Act.
Graycor next argued that the trial court erred in finding it had waived defenses to payment by failing to reject the applications within the required time period. The Court agreed in part, but ultimately upheld the summary judgment ruling. The Court explained that timely failure to reject payment does not, in itself, constitute a waiver. However, the Court concluded that a contractor must make payment on such applications either before or contemporaneous with asserting any defenses. In so doing, the Court clarified that it did not read the Act to repeal common law defenses altogether, finding that such a repeal would not be lightly inferred. A statutory repeal of common law occurs only when the Legislature’s intent to do so is clear. The Court, however, reasoned that the only way that statutory requirements of prompt payment could coexist with common law defenses to such payment is if the Act is read to require the contractor to make payment no later than the time at which it asserts such common law defenses. To hold otherwise, the Court explained, would be to render the deadlines in the Act meaningless.
Finally, Graycor argued the trial court erred in granting separate and final judgment. The Court agreed, overruling an earlier Appeals Court decision in Tocci Building Corp. v. IRIV Partners, LLC. In Tocci, the Appeals Court rejected the traditional analysis of whether to enter separate and final judgment in a case involving the Prompt Pay Act, concluding that separate and final judgment was required because to do otherwise would be to allow a defendant to retain money wrongfully withheld in violation of the Act, eviscerating the scheme for prompt payment. The Supreme Judicial Court in Business Insiders rejected such analysis, finding that nothing in the Act evinced a legislative intent to allow for immediate appeal. The Court further explained that the concerns articulated by the Appeals Court in Tocci did not apply under the Act because of the requirement that a contractor pay a subcontractor if it wishes to assert common law defenses.