Supreme Judicial Court Issues its First Decision Interpreting Prompt Pay Act

The Massachusetts Supreme Judicial Court recently issued its split decision in Business Interiors Floor Covering Business Trust v. Graycor Construction Company, Inc., et al, SJC No. 13507. In that opinion, the SJC held that the Massachusetts Prompt Pay Act (“Prompt Pay”), M.G.L. c. 149, s. 29E, prohibits a general contractor from asserting common law affirmative defenses to a Prompt Pay violation when it has failed to timely pay a subcontractor or comply with the Prompt Pay requirements for rejecting a subcontractor’s invoices.

As noted in the opinion, although “a party does not waive its defenses by failing to approve or reject an invoice within the strict time requirements established by the act,” a party cannot avail itself of those defenses in a subsequent proceeding related to the invoice unless the party has paid the invoices “prior to, or contemporaneous with, the raising of the defenses, or the defenses cannot be raised.” The SJC’s decision marks the first judicial interpretation of Prompt Pay since the Appeals Court’s 2022 decision in Tocci Building Corporation v. IRIV Partners, LLC, et al., 101 Mass. App. Ct. 133 (2022).

Facts

In November 2018, Graycor Construction Company (“Graycor”) entered into a general contract with Pacific Theaters Exhibition Corp. (“Pacific”) for a movie theater project in Boston’s North End, totaling almost $19 million. Graycor then entered into a subcontract with Business Interiors Floor Covering Business Trust (“Business Interiors”) for flooring work. After change orders, the subcontract price was $608,158. The subcontract provided for periodic payments, including a requirement that Business Interiors submit periodic invoices no later than the 15th of each month. In return, the subcontract required Graycor to pay the invoices “promptly,” but not later than the date required by “applicable law.”

During this time, Graycor was attempting to receive payment from Pacific, which was experiencing financial difficulties resulting from the closure of Pacific’s theaters due to the COVID-19 pandemic. On March 20, 2020, Business Interiors submitted a payment invoice to Graycor for $75,745.40. Graycor did not pay any portion of the invoice and neither disputed the amount due nor provided written notice rejecting the invoice. Business Interiors then sent additional invoices on April 22, 2020 and August 18, 2020 for $26,421.30 and $25.022.30, respectively. Like the previous invoice, Graycor neither paid the invoices nor disputed them.

In September 2020, Business Interiors sued Graycor, Pacific, and Podium Owner, L.P. (“Podium”), the owner of the property, for breach of contract, breach contract, breach of the covenant of good faith and fair dealing, violation of G. L. c. 93A, and quantum meruit, seeking to recover the unpaid balances. The claims centered on Graycor’s failure to pay the invoices or formally dispute them within 30 days, as required by Prompt Pay. Graycor then brought cross-claims against Pacific and Podium for breach of contract, quantum meruit, common-law indemnity, contribution, unjust enrichment, and violation of G. L. c. 93A.

In June 2022, Business Interiors sought summary judgment on its breach of contract claim against Graycor. In response, Graycor, for the first time, raised an impossibility defense. In a December 2022 hearing on the motion for summary judgment, Graycor then argued for the first time that the subcontract was s not covered by Prompt Pay because it was not eligible for a lien under G. L. c. 254, § 2 or 4, at the time the lawsuit was brought. The motion judge granted Business Interiors’s summary judgment motion on the breach of contract claim, holding that the subcontract incorporated the Prompt Pay provisions into it. The motion judge did not address Graycor’s new argument that the subcontract itself was not subject to Prompt Pay. Graycor appealed, and the SJC transferred the case from the Appeals Court on its own motion.

Analysis

In its split decision, the SJC relied heavily on the Appeals Court’s 2022 decision in Tocci, which marked the first judicial interpretation of Prompt Pay since it was passed in 2010. In Tocci, the Appeals Court enforced the Act’s requirement that objectionable subcontractor invoices must be rejected: (1) on time; (2) in writing, with an explanation of the factual and contractual basis; and (3) with a certification that the rejection is issued in good faith. If a party fails to timely reject an invoice in a writing that includes those elements, the invoice is “deemed approved” and immediately payable.

Citing Tocci, the SJC rejected Graycor’s attempt to invoke affirmative defenses to the Prompt Pay claim, holding that under Prompt Pay, a general contractor’s failure to pay a subcontractor’s invoices when it had already failed to properly and timely reject those invoices precluded the general contractor from asserting any affirmative defenses to the subcontractor’s Prompt Pay claim. As Justice Kafker explained, writing for the majority: “The invoice payments must be made prior to, or contemporaneous with, the raising of the defenses, or the defenses cannot be raised.”

The SJC also rejected Graycor’s argument that the subcontract was not a “contract for construction” covered by Prompt Pay. Graycor argued that the subcontract was not eligible for a lien under G. L. c. 254, § 2 or 4 because any lien that might have been established on the real property interest owned by Pacific (the party that entered into the original contract) would have been dissolved when Pacific’s lease with the owner was terminated. In rejecting that argument, the SJC held that because Prompt Pay references contracts for which liens “may be established” under G. L. c. 254, § 2 or 4, Prompt Pay should be interpreted broadly. The SJC pointed to two key aspects: (1) Prompt Pay’s reference to liens that “may be established,” not to contracts for which liens already have been established; and (2) Prompt Pay’s description of a wide range of construction contracts for which liens may be created. Noting that this was not a lien enforcement action, it was irrelevant whether the lien would have been dissolved when Podium terminated Pacific’s lease.

The SJC thus affirmed the lower court’s ruling on the breach of contract claim.

Looking Forward

Taken together, Tocci and Business Interiors provide clear guidance as to the parameters of Prompt Pay’s enforcement. In particular, the decision underscores the importance of contractors’ strict compliance with Prompt Pay’s timelines and content of required notices. At the same time, the decision reemphasizes the contractor’s right to substantively challenge subcontractors’ invoices, as long as the contractor has first complied with the statutory requirements.