Earlier this month, the Massachusetts Supreme Judicial Court (SJC) heard argument in J.C. Cannistraro, LLC v. Columbia Construction Co. et al., a dispute concerning the state’s Prompt Payment Act (PPA). Although a decision has yet to be issued, it could potentially pose widespread implications for high-value private construction projects moving forward – and perhaps backwards.
The PPA, G. L. c. 149, § 29E, enacted by the Massachusetts Legislature in 2010, has become a keystone in the construction industry. It was enacted to address, in part, downstream cash flow issues that tend to pervade construction projects by mandating a series of strict guidelines for submitting, and responding to, payment applications for private projects valued over $3,000,000. Amongst these requirements are set timeframes to respond to an application, as well as what must be contained in an application rejection. Critically, if an owner or upper-tier contractor fails to fully comply with all the statutory requirements in response to a proper payment application, the application is automatically “deemed to be approved” and payable. Significantly, however, this is not always the end of the line.
Within the past few years, higher courts have increasingly faced issues of the practical implications of the PPA. In a 2022 decision, the Appeals Court confirmed that—while failure to strictly comply with the statutory requirements for rejecting payment applications will render those applications “deemed approved by operation of law,”—that same failure will not constitute a waiver of claims that a project owner or upstream contractor may have in connection with those paymentsl therefore, nothing precludes the upper-tier from bringing “any and all claims it has for breach of contract against the payee[,] and may recoup any money it may be owed.” Tocci Building Corporation v. IRIV Partners, LLC, 101 Mass. App. Ct. 133, 140-42 (2022). The SJC then went even further in the case of Business Interiors Floor Covering Business Trust v. Graycor Construction Co., 494 Mass. 216 (Graycor), where it held that even if payment applications are deemed approved by operation of the PPA, an owner or contractor may still employ defenses in a subsequent proceeding to show why payment is not owed, so long as payment has been made prior to, or contemporaneous to, raising those defenses – otherwise, such right is impliedly waived under the PPA.
The Cannistraro case comes directly in the wake of these two decisions. There, a subcontractor brought suit against a general contractor for the value of two payment applications that it alleged were deemed approved under the statute. In its response to both the complaint and a subsequent arbitration demand, the contractor contended that the applications were properly rejected and it denied owing anything to the subcontractor. An arbitrator later determined that the rejections violated the terms of the statute, and the contractor was ordered to pay both applications. After remitting payment, however, the contractor brought a counterclaim against the subcontractor to recoup amounts it disputed from both applications. Although the arbitrator found for the contractor and ordered the subcontractor to disgorge payment, the order was subsequently vacated. The trial court, based its decision (at least in part) on the Graycor decision and the fact that payments were not made to the subcontractor until after the contractor had already raised its defenses.
While, at its core, the Cannistraro SJC is an evaluation of an arbitrator’s power, the issues informing the parties’ respective arguments have a much broader sweep. Amongst other things, the contractor contends that the Graycor holding (which was decided after the award of payments to be returned to the contractor) constituted a new interpretation of the PPA, and therefore the trial court’s “retroactive” application to invalidate its award was improper. On the other hand, the subcontractor argues that Graycor did not represent a change to the PPA, but merely a clarification of what has always been required; thus, by allowing the contractor’s recoupment counterclaim to proceed, the arbitrator crafted an “extra-statutory remedy” that stood in direct conflict with the PPA and essentially nullified its impact.
At oral arguments last month, the SJC questioned the parties about their respective positions and in doing so, touched upon several intersecting considerations charging the underlying dispute. These included, inter alia, the powers of an arbitrator, rules of pleading, and judicial review. In weeding through these topics, both parties confirmed to the Court that they did not view the issues at bar as comprising a “vanishing problem,” nor one that will self-correct. In parallel, the Justices emanated a collective concern as to how to move the industry forward while enabling “meaningful consequences” in instances of statutory violations.
The tension between these concepts alone reflects the need for the higher court’s guidance. After all, it is impossible not to see irony where the “protection” of the PPA results in a subcontractor, who is refused payment in direct violation of the statute, being tasked with the responsibility of pursuing the amounts owed, only to then have some (or all) of that payment clawed back by the offending party as soon as money changes hands. Yet, is it any more just to require a contractor, who reasonably disputes whether a statutory violation occurred, to pay for disputed services at the outset or else risk losing key claims and defenses? No decision has yet issued, but the resolution is sure to generate ripple effects towards all corners of the construction industry.
