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Massachusetts Prompt-Payment Act Becomes Effective 0n November 8, 2010

Jo-Ann Marzullo November 4, 2010

On August 10, 2010, Governor Patrick approved the Prompt Payment Act, General Laws, Chapter 149, §29E, which affects private construction contracts with an original contract price of $3 million or more entered into after November 8, 2010, the date the law becomes effective (1).  Construction contracts and administration of construction contracts entered into after that date must be modified from the prior practice.

Periodic Payment Cycles of Less Than 30 Days

The new law requires that a person or entity seeking payment under construction contracts submit to the payor written applications for periodic progress payments in cycles of no greater than 30 days.  Applications for such progress payments must be approved or rejected by the payor within 15 days after submission, however, this time period may be increased by 7 days for each tier the payee is below the prime contractor.  Payment must be made within 45 days after approval.  An application that is neither timely approved or rejected is “deemed” approved unless rejected before the date payment is due.

Change Orders Must Be Approved or Rejected in 30 Days

The Act requires that each contract contain a reasonable time period within which a written request for an increase in the contract price shall be approved or rejected by the payor, whether in whole or in part, not to exceed 30 days.  This time period may also be extended by 7 days for each tier the proposed payee is below the prime contract.  If the request for an increase is neither approved nor rejected within 30 days, it is “deemed” approved and may be submitted for payment in the next application for payment unless it is rejected before the payment is due.  Any rejection must be made in writing, must include an explanation of the factual and contractual basis for the rejection and must be certified as made in good faith.  The Prompt-Payment Act provides that any rejection is subject to the applicable dispute resolution procedures set forth in the contract, if any.

Pay-if-Paid Clauses are Largely Unenforceable Under New Law

The use of conditional payment or “pay-if-paid” clauses are void and unenforceable under the new law save for two circumstances.  Conditional payment clauses remain enforceable: (1) when payment is withheld based upon the failure of the payee to perform and cure the default within the time provided for under the contract (or 14 days if the contract is silent with regard to a cure period) after receipt by the payee of written notice of the default; and (2) where the payor is insolvent or becomes insolvent within 90 days after the submission of the application for which payment is sought.  However, as a prerequisite, the party seeking to enforce a conditional payment clause under these circumstances must have a Notice of Contract filed pursuant to the provisions of Massachusetts Mechanic’s Lien Statute, G.L. c. 254, § 1, et. seq., prior to the first payment application.  In addition, the party seeking enforcement is required to (i) pursue all legal remedies to obtain payment and (ii) disclose to the payee the actual legal remedies it is pursuing to obtain collection, in each case, from such third-party that is withholding payment.

Finally, the statute renders unenforceable contracts that require a payee under a contract to wait more than 60 days to exercise its rights in the dispute resolution process set forth in the contract in the event of a rejection of a payment request or change order.  In addition, construction contracts requiring a payee under a contract to continue performing even where an approved application for, or an increase in, payment has been outstanding for more than 30 days are also unenforceable, unless there exists an uncured default after adequate notice or a good faith dispute relating to the construction quality or quantity.

If you have further questions regarding this, please contact Jo-Ann Marzullo.

(1)  The Act exempts small-scale projects of four or fewer dwelling units.

This Alert is provided for information purposes only, and does not constitute legal advice.  According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2010 Posternak Blankstein & Lund LLP.  All rights reserved.

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