Tag Archives: private construction

Forfeiture Rule in Construction Disputes Under Review by the Massachusetts Supreme Judicial Court

By on March 6, 2018

Since the early 1900’s, Massachusetts courts have held that a contractor cannot recover on the contract itself without showing complete and strict performance of all terms or, in the event the contract cannot be completed fully, that the contractor substantially performed and attempted, in good faith, to perform fully. Under this rule, if the court finds that the contractor intentionally departed from the specifications of the contract, the contractor is prohibited from recovering under the contract, forfeiting its right to contract damages. 

The Massachusetts Supreme Judicial Court (SJC) will hear arguments this week requesting the forfeiture rule in construction cases to be overturned. The appellant in G4S Technology LLC v. Mass. Tech. Park Corp., SJC-12397, appeals a prior summary judgment ruling, wherein the trial court denied the contractor’s claims for approximately $10 million in delay-and-impact damages on the basis of the forfeiture rule. Despite ultimately completing the project, it was determined that the contractor paid some of its subcontractors late and submitted false certifications. Those actions were in breach the contract, and the trial court determined that those actions were sufficient to deny the contractor’s claims.

The SJC will consider whether Massachusetts should adopt an alternative standard that considers whether a breach was an uncured, material breach that alleviates the non-breaching party’s obligation to pay and weigh a breaching party’s lack of good faith or willfulness, among other factors to be considered by the court. This multi-factor analysis is applied currently by Massachusetts courts in other contract disputes, but not in connection with construction disputes.

Should the forfeiture rule be overturned, it would have wide-reaching consequences and create greater flexibility in arguing an entitlement to damages on breach of contract claims. Contractors would be wise to keep track of this case as it proceeds. If you have questions concerning your rights in connection with a construction dispute, consult an experienced Massachusetts construction attorney.

Promise to Pay Doesn’t Change Mechanic’s Lien Deadline

By on February 20, 2018

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. 

 

Show Me the Money: Getting Paid on Private Massachusetts Construction Projects

By on March 15, 2017

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.

Proposed Changes to The Retainage Law for Massachusetts Private Construction Projects

By on June 30, 2015

*with contributions from Christopher D. Strang

In November 2014, the Massachusetts Legislature passed Mass. Gen. Law c. 149, § 29F, entitled “Payment of Retainage in Private Construction Projects” (“The Retainage Law”).  The Retainage Law reduced the amount of retainage that can be withheld on many large private construction projects. It also provides deadlines for paying retainage amounts and methods for determining the date of substantial completion.  The Massachusetts Senate recently held hearings on proposed Bill Number 1006, which seeks to amend the statutory language of this law.

Under the changes proposed in Bill 1006, The Retainage Law would be limited in its application and would only control the amount of retainage withheld on certain private construction projects. Below is an explanation of the standards The Retainage Law currently sets forth, followed by an explanation of the changes Bill 1006 proposes.

Projects Covered by The Retainage Law

The Retainage Law applies to all private construction contracts entered into after November 6, 2014 valued over $3 million dollars, with the exception of residential projects for four or fewer units.

Limitations on Retainage

Retainage is specifically limited to 5% of each periodic payment. Contracts that either waive, limit or subvert the 5% retainage cap may be void and unenforceable under the statute.

Notices of Substantial Completion

Under The Retainage Law, general contractors must submit a “Notice of Substantial Completion” to the owner within 14 days of determining that it has achieved substantial completion. The statute defines “substantial completion” as the stage in the project where the project work is sufficiently complete as to permit the owner to occupy or utilize the premises for its intended use. Substantial completion may be applied to the project as a whole or to a phase of the entire project where the contract permits substantial completion for project phases.

The owner then has 14 days to notify the general contractor whether it accepts or rejects the Notice of Substantial Completion. To reject it, an owner must notify the contractor in writing and include “the factual and contractual basis for rejection,” along with a certification that the rejection was made in good faith. Rejection of the Notice of Substantial Completion permits the contractor to utilize the dispute resolution procedures provided for in the contract, which must begin within 7 days after the rejection (unless the contractor later resubmits a Notice of Substantial Completion). If the owner fails to deliver notice of its rejection within 14 days, or fails to comply with the requirements of Section 29F(d), the date indicated by the contractor in the Notice of Substantial Completion will be deemed accepted by the owner.

The owner has 14 days from the date the Notice of Substantial Completion is accepted to submit a written punchlist to the contractor. The punchlist must describe all incomplete or defective work items and deliverables required of the contractor, and include a certification that it is made in good faith. A “Deliverable” is defined by Section 29F(a) as “a project close-out document that shall be submitted by the [contractor] seeking payment of retainage under the [contractor’s contract] for construction; provided, however, that a lien waiver or release, which is a deliverable, shall comply with chapter 254; and provided further, that ‘deliverable’ shall not include any document affirming, certifying or confirming completion or correction of labor, materials or other items furnished or incomplete or defective work.” The contractor must then pass on a written punchlist to each subcontractor it is holding retainage against within an additional 7 days (or 21 days after the date the Notice of Substantial Completion is accepted), detailing all incomplete or defective work items and deliverables. The punchlist to the contractor’s subcontractors may include items beyond those on the owner’s punchlist and must also include a certification that it is made in good faith. Both the general contractor and subcontractors are permitted under The Retainage Law to dispute the items listed on punchlists.

Applications for Payment of Retainage

General contractors and subcontractors must submit a written application for payment of retainage within 60 days after the date of substantial completion for a final and binding resolution regarding a disputed date. This application must include a written list of all punchlist items that were completed, repaired, and delivered, and must be certified by the submitting party that it was made in good faith.

The owner then has 30 days to provide payment of retainage to the contractor. When providing payment of retainage, owners are permitted to withhold portions of the retainage to cover incomplete or defective work, limited by the following:

  • for incomplete, incorrect or missing deliverables, either (a) the value of the deliverable, as mutually agreed upon in writing between the owner and contractor or (b) if no value has been agreed upon, the reasonable value of the deliverables, not to exceed 2.5% of the total adjusted contract price;
  • 150% of the reasonable cost to complete or correct incomplete or defective work items; and
  • the reasonable value of claims and any costs, expenses and attorney’s fees incurred if the claim is allowed under the contract.

Portions of retainage may only be withheld where the contractor seeking payment received a detailed punchlist from the owner prior to the date payment is due. The time period for payment under an application for payment is extended by a period of 7 days for the contractor at each tier of contract below the general subcontractor. Contractors may submit further applications for payment of retainage as work is completed on the project. The Retainage Law specifically prevents owners from withholding retainage payments otherwise due to subcontractors where the general contractor is not in default. General contractors have 7 days to forward retainage payments to subcontractors.

At a minimum, The Retainage Law requires applications for payment of retainage to be submitted at least once a month. Rejection of an application is also subject to dispute resolution procedures, which may be initiated 30 days after the rejection of an application for payment of retainage.

Bill No. 1006 – Proposed Changes to The Retainage Law

Bill 1006, if passed, will dramatically change the scope and effect of The Retainage Law. It would add exemptions for construction projects which are financed or supported, in whole or in part, by state or federal mortgage assistance, special taxing arrangements, tax credits, grants, issuance of bonds, loans, loan guarantees, debt, or equity assistance.

It also proposes removing the sections relating to notices of substantial completion and applications for payment of retainage entirely. Bill 1006 would reduce The Retainage Law to the following content: (1) retainage is limited to 5% of the contract price and (2) contracts which require or permit retainage in excess of 5% of the contract price will be void and unenforceable insofar as any such excess is concerned.

Impact of The Retainage Law and Bill No. 1006

Citing practical issues with meeting the deadlines set forth in The Retainage Law, some project developers and owners have articulated a desire to remove large portions of it. In particular, they cite the 14-day limitation to accept or reject the date of substantial completion as impractical and unachievable. Some general contractors criticize the additional 7 days for paying subcontractors, and for completing and forwarding punchlists. Some also claim the law does not adequately consider the complexity of communication between multiple parties on large projects.

Bill 1006 alters the language that retainage may not exceed 5% of “any progress payment” to state that retainage may not exceed 5% “of the contract price.” While the amount would equal out at the end of the project, the proposed changes would arguably allow an owner or higher tiered contractor to withhold more than 5% from any single payment, so long as the amount equals 5% of the total contract price. Such a change could negate the benefit contractors receive through larger progress payments throughout a project, but would have no impact on the amount of retainage outstanding at the end of the project.

Whether Bill 1006 will be enacted and what additional changes, if any, are to be made to the Retainage Law will be determined over the next several months. It is clear that there is significant interest in creating consistency in retainage guidelines for the construction industry.

The foregoing information is a general summary regarding proposed changes to retainage in private construction projects in Massachusetts. If you are uncertain about anything regarding the amount of retainage withheld on a project or the process of obtaining payment for retainage amounts, contact your construction attorney to ensure the necessary steps are taken to achieve the best possible outcome.