Strang Scott partner, Chris Strang, co-authored and article with Brendan Carter from the Associated General Contractors of Massachusetts that was published recently on the cover of the American Bar Association’s “Under Construction” quarterly newsletter. The article details a case where Strang Scott prevailed against the Commonwealth of Massachusetts, successfully arguing that the awarding authority has a duty to ensure the validity of payment bonds provided by general contractors on public construction projects in Massachusetts. The case was a matter of first impression in Massachusetts courts.
In a recent decision, D5 Iron Works, Inc. v. Danvers Fish & Game Club, Inc., & Others, the Appeals Court of Massachusetts ruled that an owner’s promise to make payment to the subcontractor did not excuse the subcontractor’s failure to timely file suit.
In the case, the general contractor was delinquent in paying the subcontractor. The subcontractor timely filed a Notice of Contract as well as a Statement of Account . Nevertheless, Massachusetts lien law requires that a lawsuit be filed within 90 days of filing the Statement of Account.
According to the Subcontractor, the project owner represented that the subcontractor would be paid. The subcontractor testified that it relied on that representation in not timely filing the lawsuit.
Consistent with its prior decisions, the court ruled that mechanic’s lien statutory deadlines are to be strictly enforced, and denied the subcontractor’s claims.* This case stands as a fresh reminder that the statutory deadlines for mechanic’s lien filings are enforced strictly, and not generally subject to extension or modification by private agreement. Contractors and subcontractors should take care to observe deadlines ardently in order to avoid losing their mechanic’s lien rights.
*At the time of this article, it remains unclear whether either party will appeal the decision, which went unpublished.
The Massachusetts Retainage Act limits the amount of retainage allowed for private construction projects, and imposes mandatory processes for reaching the date of substantial completion, submitting punchlists and completing punchlist items, and submitting applications for payment and obtaining payment of retainage.
The Act applies to all construction contracts signed after November 4, 2014, for privately owned projects where the original contract price with the owner is at least three million dollars and the general contractor, subcontractors, or design professionals would have mechanic’s lien rights , but exempts residential housing projects of one to four units.
Limit on Retainage
Under the Act, no more than five percent retainage may be withheld from any progress payment. Among other things, this prohibits frontloading retainage amounts for a portion of the project, with less held at the end.
The Act defines substantial completion as the stage in the project when the work required under the general contractor’s contract with the owner is “is sufficiently complete … so that the project owner may occupy or utilize the work for its intended use.” Substantial completion may apply to the entire project or to a phase of the project, but only where the project owner has expressly allowed substantial completion for defined phases.
In order to reach substantial completion, the general contractor must submit a form for notice of substantial completion, as contained in the Act, to the owner within fourteen days of reaching the stage when the general contractor believes the project is substantially complete. Then the owner has fourteen days to accept or reject the general contractor’s notice. Should the owner fail to timely respond to the notice, the owner is deemed accept to general contractor’s work as substantially complete. If the owner accepts the notice, the date of substantial completion is set and is binding upon all related aspects of the contract. If the owner rejects the notice, it must notify the general contractor in writing of the rejection and include the factual and contractual basis for the rejection and a certification that the rejection is made in good faith. The Act permits an expedited process for the general contractor to dispute the rejection under the contract’s dispute resolution procedures. Alternatively, the general contractor can resubmit a form for notice of substantial completion to the owner for new approval.
Submission of Punchlists and Completion of Punchlist Items
Within fourteen days after acceptance (whether express or deemed accepted) of the notice of substantial completion, or the final and binding resolution of a dispute, the owner must submit a written punchlist “describing all incomplete or defective work items and deliverables” to the general contractor. The owner’s punchlist must be certified as made in good faith.
The general contractor has an additional week after the owner’s deadline expires, or twenty-one total days after acceptance, to submit a punchlist to each subcontractor from whom the general contractor is holding retainage “describing all incomplete or defective work items and deliverables required,” which may include items in addition to the owner’s punchlist. The general contractor’s punchlist to its subcontractors and suppliers must be certified as made in good faith. General contractors, subcontractors and suppliers are permitted to dispute punchlist items directed to them.
Submitting Applications for Payment and Obtaining Payment of Retainage
The general contractor, subcontractors and suppliers from whom retainage is held may submit written applications for payment of retainage no sooner than 60 days following the date of substantial completion. Each contractor shall use the form required by their contract to apply for payment of retainage. Alternatively, the project owner and general contractor may allow for earlier submission dates. An application for payment of retainage must include the punchlist, along with a written list identifying which items have been completed, repaired or delivered, and a certification that the application is submitted in good faith.
Applications for retainage must be paid within thirty days of receipt, minus any withholdings described below. For each tier of contract below the prime contact with the owner, the time period for paying retainage is extended by seven days.
Should the owner or contractor seek to withhold payment of retainage, they are limited to (1) the value of incomplete, incorrect or missing deliverables as either agreed upon by the parties or, if no agreement is reached, no more than two and a half percent of the total adjusted contract price; (2) one hundred and fifty percent of the reasonable cost to complete or correct incomplete or defective work items; and (3) the reasonable value of claims and any costs, expenses, or attorneys’ fees incurred as a result of the claims (but only when permitted by the terms of the contract).
Retainage, or any portion thereof, cannot be withheld unless the party seeking payment receives, before the date payment is due, a written explanation “of the incomplete or defective work items and incomplete, incorrect or missing deliverables, the factual and contractual basis for the claims and the value attributable to each incomplete or defective work item, deliverable and claim.” The explanation of withholding must also be certified as made in good faith.
Moreover, the Act prohibits the owner from holding any portion of retainage due to subcontractors or suppliers that are not the subject of the owner’s claim against the general contractor, unless the owner has declared the general contractor in default under its contract.
As the foregoing makes plain, the Act requires all parties to a project to adhere to strict guidelines in connection with withholding, and later releasing retainage. In order to gain a full understanding of how the Act and other statutes govern Massachusetts construction projects, and how to preserve your rights under those statutes, contractors would be wise to consult with a Massachusetts construction attorney regarding their specific contract and situation.
Damages for work performed under a construction contract may be awarded under a variety of legal theories. One such theory is the principle of quantum meruit, which, when established, allows for an award of the reasonable value of goods or services as compensation for the value of “enrichment” those goods or services provide. Generally, one must demonstrate both good faith and substantial performance in order to recover on the theory of quantum meruit.
Recently, the Massachusetts Appeals Court reversed an award of damages on a quantum meruit claim after homeowners terminated their contract prior to completion of work.
In Pinecone Construction, Inc. v. Sridhar, the trial court awarded quantum meruit damages to a contractor, reasoning that while the contractor’s work intentionally departed from the contract specifications, the work was “structurally sound” and was used in completing the project. As a result, the court concluded that “equity demands” that the contractor recover the value of its labor and materials provided prior to termination. On appeal, the Appeals Court reversed, determining the trial court’s reasoning to be circular, and held that as a matter of law a contractor cannot recover quantum meruit damages without showing both good faith and substantial performance, without regard to any benefit or enrichment conveyed to the homeowners. Because the trial court found the contractor’s intentional departure from contract specifications tantamount to bad faith, the damages award was overturned and the homeowners were separately awarded damages for the cost of completion and under the Massachusetts Home Improvement Contractor Act and Mass. Gen. Laws Chapter 93A.
While Pinecone Construction is an unpublished opinion, it should stand as a cautionary tale to contractors – failure to perform work in good faith can bar even equitable recovery for work performed. If you have questions regarding your ability to recover damages for your work on a home improvement contract or other construction work, you should contact an experienced construction lawyer to determine your rights and assess your potential remedies.
Selecting a contractor for a home improvement project is both exciting and fraught with peril. The right one can deliver your dream home, and the wrong one can make your living space a nightmare for an extended period of time. Fortunately, Massachusetts maintains strong consumer protections against the latter in M.G.L. c. 142A, the Home Improvement Contractor statute.
Contractors are required by law to include specific provisions and notices in contracts with consumers. Homeowners should thoroughly investigate the contractor up front and be well-versed in their rights.
Construction consumers should consider some practical tips is selecting their residential construction or home improvement contractor:
(2) Make sure the contractor you choose is registered as a Massachusetts home improvement contractor;
(3) Verify that the construction supervisor the company plans to use to oversee the project day-to-day has a valid construction supervisor’s license; and
(4) Insist upon a complete written contract, signed by both parties, prior to making any deposits or starting any work. At a minimum, your contract should include the following information:
a physical address for the contractor, not just a post office box, along with the name of the salesperson and the construction supervisor for your project;
a start date and a completion date for work, so that you don’t find yourself lower on the contractor’s priority list than other projects soon after making your deposit;
a clear scope of work, including as much detail as possible. If you’ve agreed upon certain brands for hardware or fixtures, be sure those brands appear in the contract; and
specific benchmarks for making progress payments, including the amount for each such payment.
Do not make final payment to your contractor until all of the work is completed to your satisfaction. Be sure to ask for a copy of the contractor’s insurance policy and call the insurance company to verify that it is current.
For substantial projects, have a qualified construction lawyer review your contract prior to signing it. A small investment with a construction attorney can save thousands of dollars and immense frustration by avoiding traps for the unwary hidden in contract documents and by adding appropriate layers of protection into your contract that homeowners are not likely to add on their own.
Traditionally, general contractors on Massachusetts state-level public construction projects employed one of two types of risk allocation provisions in payment clauses in their subcontracts with subcontractors: a “pay-if-paid” or a “paid-when-paid” clause. This changed, however, due to a 2004 Massachusetts court decision that largely did away with condition precedent payment clauses commonly referred to as “pay-if-paid” clauses. While the differences between the two clauses may not jump off the page, the use of one rather than the other had a significant impact on a subcontractor’s right to collect payment from the general contractor.
“Pay-if-paid” clauses create a condition precedent to payment. That is, a subcontractor has no right to be paid for completed work until or unless the general contractor received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, a “pay-when-paid” clause is a timing provision; that is, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within a ‘reasonable time’ the subcontractor retains the right to collect payment from the general contractor for its work. Ambiguous contract language often complicated the subtle, yet substantial, difference between the two types of clauses, leading to high stakes contract interpretation disputes.
In 2004, Massachusetts did away with the distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects. In, Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004), the court reasoned, that absent express contract language, if “payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner,” then the default interpretation of subcontract payment provisions, “should be viewed ‘only as postponing payment by the general contractor for a reasonable time after requisition … so as to afford the general contractor an opportunity to obtain funds from the owner.’” This decision virtually eliminated “pay-if-paid” in favor of “paid-when-paid” clauses on Massachusetts state-level construction projects.
While the holding in Framingham is generally good news for payment-seeking subcontractors, the issue remains, however, as to what a “reasonable time,” is to afford general contractors before general contractors must make payment to subcontractors should the owner not pay. In Framingham, the court determined that where the payment issues originated in December 1998 and continued through March 1999, that by the end of April 1999, “the general contractor had exceeded any reasonable period of time,” and thus the subcontractor’s claim for payment for completed work could not be defeated even though the owner had yet to pay the general contractor for the subcontractor’s work.
There has been no subsequent case in Massachusetts that further defines the “reasonable time” standard to determine when general contractors must pay subcontractors when the general contractor objects to making payment as a result of a “pay-when-paid” clause. Thus, subcontractors should be keenly aware of any developments in the law regarding what constitutes “reasonable time” for payment in connection with these provisions. If you have questions regarding payment issues on state-level public construction projects you should contact a Massachusetts construction lawyer.
As a general rule, parties to private contracts are afforded wide latitude to dictate and negotiate the terms as they see fit. While this notion of “freedom of contract” is an entrenched tradition within American law it is not without its limitations. The Prompt Pay Act, enacted in 2010, is one such limitation that every Massachusetts sub-contractor and contractor should have an acute awareness of.
In effect the Prompt Pay Act requires that standard state provisions be incorporated into otherwise private construction contracts with an original valuation of over three million dollars. The Prompt Pay Act specifically affects the interpretation of payment clauses in such contracts.
As a reminder, “pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.
In 2004, Massachusetts did away with distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects. Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.”
Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. On federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context.
The Prompt Pay Act directs that, on private construction projects valued at over three million dollars, payment clauses be interpreted as “pay-when-paid,” thus effectively eliminating “pay-if-paid” in most instances. Specifically, and with very narrow exception, “[a] provision in a contract for construction which makes payment to a person performing the construction conditioned upon receipt of payment from a third person that is not a party to the contract shall be void and unenforceable.” MGL c. 149 sec. 29E (e).
This statutory language is a clear attempt, in the name of the broad public interest, to provide protections to subcontractors by endeavoring to ensure swift payment for work provided in order to keep construction projects moving and companies afloat by regulating cash flow.
Smith Ironworks, Inc. v. Torrey Co., Inc., Not Reported in N.E.3d (2014), is the only Massachusetts case to discuss the Prompt Pay Act at any length. Even so, it is an arbitration decision as discussed in Smith, and not the Court itself, that provides the limited interpretation of the Act. In Smith, the subcontractor applied for payment from the contractor for work provided on a private project. Disputes as to the actual amount owed existed, however, rather than actively reject the request for payment, the contractor did not respond at all. Pursuant to the terms of the Prompt Pay Act the request for payment was deemed approved after the statutorily prescribed time passed without formal rejection. The parties submitted to voluntary arbitration and an arbitrator found that the contractor was liable to the subcontractor for the amounts submitted, plus interest, as the contractor failed to properly respond to the request for payment as prescribed by the Prompt Pay Act. The contractor was deemed liable even though it had not been paid in full by the owner.
To reiterate, while Smith details an outcome favorable to a subcontractor by application of the Prompt Pay Act, that outcome is not of true precedential value. Questions remain as to the effectiveness of the Prompt Pay Act. Specifically, questions regarding the true parameters and enforceability of payment timelines and the exact remedy for non-compliance. Thus, subcontractors should keep an eye towards the development of the law in this area and strive to understand how the Prompt Pay Act may apply to various projects. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.
Most construction project owners require general contractors to provide periodic lien waivers from subcontractors and material suppliers to verify they received payment. This is generally a good thing, as it helps ensure payment is flowing down to the proper parties. Lien waivers, however, can become the source of conflict when parties can’t agree on their terms.
Lien waivers frequently become contentious because they are presented for the first time when payment is due. Almost inevitably the lien waiver will contain terms that are inconsistent with or in addition to existing contract terms, and every day spent negotiating the particular language of the lien waivers delays payment already due. Delayed payments have a ripple effect, as contractors rely on prompt payments to keep up with labor and material costs, and to keep the project running on schedule.
Among the most common sticking points is waiver language that is simply too broad. Payment is being made in exchange for labor and materials provided on a project through a particular date. Yet owners often propose lien waivers that try to force contractors to release much more than that. Commonly owners propose clauses that require the payee to promise to indemnify the payor for other liens filed on the project, among others. Of course, the party holding the money maintains some unfair leverage to force the other to sign away rights not contemplated when negotiating the original contract in order to get paid.
To prevent disruptive disputes during the course of construction, prudent parties should review and negotiate the actual lien waiver forms as appendices to contracts, prior to signing anything. This practice is wise for contracts between owners and general contractors as well as between general contractors and subcontractors or material suppliers. It is also always best to have a construction attorney review your contracts and lien waivers to fully understand the rights and responsibilities included in them.
In the matter of City of Rochester v. Marcel Payeur et al., the New Hampshire Supreme Court had occasion to consider whether the common law doctrine of Nullum Tempus Occurit Regi (literally “time does not run against the king”) tolled the the statute of limitations against breach of contract claims against private entities filed by municipalities.
The doctrine of Nullum Tempus derives from common law and serves to protect the public’s interest in public rights and revenue and against injury to public property and lands. The policy underlying the doctrine suggests that it is in the public’s interest to toll the statute of limitations for claims asserted by the government because the government is in a disadvantaged position to enforce the public’s rights against injury vigilantly, as the government’s agents are too few in number and too occupied with ordinary governmental duties to prevent or redress injuries to public rights seasonably.
In the instant matter, the City of Rochester engaged the primary defendant to recoat a public water tank, to modify the tank and to install a mixer in the tank. After the work was performed, the tank developed a leak. During the investigation of the leak, the City of Rochester determined that in addition to improper modification work, the tank was constructed improperly when it was built. The construction of the tank was completed in 1985. Following its investigation, the City of Rochester filed suit against the contractor that performed the repair and modification work and the contractor that built the tank in 1985, among others. The company that initially built the tank moved to dismiss the claims against it citing the statute of limitations found in NH RSA 508:4. The Superior Court agreed with the company, and dismissed the claims against it as time barred. The City of Rochester appealed.
On appeal, the New Hampshire Supreme Court affirmed the trial court ruling. In the opinion, the court reasoned that the public policy rationale supporting Nullum Tempus was inapplicable to municipal contracts, because municipalities function like private parties in the contracting context. The court determined that municipalities are not disadvantaged in their contractual relationships and are equally equipped as private parties to enforce the terms of their agreements. Accordingly, the court concluded that public policy ends advanced by Nullum Tempus were not served by application of that doctrine in connection with municipal contracts with private entities.
Additionally, the court resolved that applying Nullum Tempus in this circumstance would undermine the public policy interests supporting the statute of limitations. Namely, that permitting municipalities to assert claims against contractors on an almost limitless basis would be contrary to the policy end of providing defendants timely notice of claims against them, which protects defendants from stale claims. Further, the court noted that in this context, Nullum Tempus would likely subject contractors to claims that would be unduly difficult to defend, costly, and time-consuming, due to faded memories, lost or destroyed evidence and witnesses that may be dead, unavailable or simply not able to be located after a long passage of time. In short, the court determined that the policy interests supporting the application of statute of limitations were more compelling in this context than those supporting Nullum Tempus. Accordingly, the court affirmed the Superior Court’s dismissal of the claims as time barred.
The decision in City of Rochester is a favorable one for contractors and subcontractors. Not only does it reaffirm contractors’ expectations regarding the duration of their potential exposures, it signals the New Hampshire Courts’ intention to treat municipalities more like private entities in contracting. For contractors, this decision should provide more certainty that municipalities will be held to the terms of the agreements they reach with private entities performing work for them. Contractors, however, should anticipate that sophisticated municipalities will take additional steps to limit future exposures of this kind in light of the court’s decision. As a result, contractors should exercise care in reviewing the terms of contracts with municipalities subsequent to this decision. In order to limit exposure and fully understand the risks associated with any municipal contract, contractors should review proposed contracts with their New Hampshire construction attorney.
The Boston Bar Foundation (BBF) Board of Trustees elected Strang Scott partner Chris Strang to the office of Treasurer for the organization. Chris has already served the BBF in many capacities, including being a member of the Executive Committee, Board of Trustees, Society of Fellows, Young Lawyers Advisory Council and many ad hoc or fundraising event planning committees.
The BBF is the charitable arm of the Boston Bar Association. It raises money to provide grants for many community organizations that further the mission of the BBF. These include providing legal services and access to justice to those in need, as well as a variety of public service activities. To learn more, please visit the BBF: http://bostonbarfoundation.org/