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06.18.2024 | Legal Advisory

On June 17, 2024, the Supreme Judicial Court (SJC) issued its first decision interpreting the Massachusetts Prompt Pay Act (the “PPA”). In Business Interiors Floor Covering Business Trust v. Graycor Construction Co., Inc.,[1] the court addressed some of the key language of the PPA and its consequences. In summary, the court found that, if an owner or general contractor failed to approve or reject an application for payment within the time period prescribed by the PPA, that owner or general contractor will have waived its defenses if it does not make payment before raising those defenses. In Business Interiors, the SJC gives real meaning to the language of the PPA, and parties failing to follow it can face significant consequences.

The case before the court involved a general contractor, Graycor, and its subcontractor, Business Interiors. Graycor was responsible for building a new movie theater in Boston for the owner, Pacific Theatres Exhibition Corporation, and Graycor hired Business Interiors to complete the flooring. In the course of its work in 2020, Business Interiors submitted three invoices totaling approximately $127,000 to Graycor, and Graycor failed to pay them, reject them, or approve them within the time permitted by the PPA.[2] Around the same time, the owner of the movie theater experienced severe financial difficulties and notified its general contractor that it had no revenue coming in and that all payables were “being held until further notice.”

Under the PPA, “an application for a periodic progress payment which is neither approved nor rejected within the time period shall be deemed to be approved unless is it rejected before the date payment is due.”[3] A rejection of an application must be “made in writing” and “include an explanation of the factual and contractual basis for the rejection,” along with a certification that the rejection was made in “good faith.”[4] Moreover, any rejection is subject to the dispute resolution procedure provided for in the contract. The question before the court, in essence, was whether the fact that the application was “deemed approved” had any legal significance. The SJC found that it did.

In this case, Business Interiors brought suit seeking payment, and among other defenses, Graycor raised the defense of impossibility, due to the COVID-19 pandemic, which resulted in the owner ceasing its payments to Graycor. The SJC held that because Graycor had failed to make payment to Business Interiors before raising this affirmative defense, the defense was deemed waived. In other words, to preserve its defenses, Graycor was required under the PPA to make payment before it filed its answer in court. As the court wrote, “In sum, payment of overdue invoices must be made prior to, or contemporaneous with, raising common-law defenses, or the defenses cannot be raised.”

The court also addressed two other related issues in its opinion. First, it found that the definition of “contract for construction” under the PPA applies to contracts for which liens may be established under G.L. c. 254 § 2 or 4 (the mechanics’ lien statute), not necessarily contracts for which liens have been established. The court also held that a separate and final judgment, previously allowed for by an appeals court decision, were not provided for under the PPA.

What’s Next?

For the first time, the SJC provided real guidance on the PPA and the consequences for failing to adhere to it. Owners and general contractors who are withholding payment, without following the requirements of the PPA, do so at their own risk. Failure to make payment, without rejecting the application in accordance with the PPA, will waive owners’ and general contractors’ defenses that may have otherwise been valid in litigation. Nutter’s experienced team can assist businesses working through this process.

This advisory was prepared by Sarah Kelly in Nutter’s Litigation Department and Christopher Papavasiliou in Nutter’s Real Estate Department. For more information, please contact the authors or your Nutter attorney at 617.439.2000.

[1] SJC No. 13507, 2024 WL 3016128.

[2] For approval or rejection of an application for payment, the time period is a maximum of fifteen days after submission of the application, though this time period “may be extended by [seven] days” for “each tier of contract below the owner of the project.” G.L. 149 § 29E (c).

[3] G.L. 149 § 29E (c).

[4] G.L. 149 § 29E (c).

This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.