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.
The White House recently released its “Legislative Outline for Rebuilding Infrastructure in America.”
In the preamble to the outline, The White House requested that Congress act to implement the infrastructure program in short order through new legislation. In broad strokes, the outline calls for new spending to stimulate $1.5 trillion dollars in infrastructure investments, from federal and state governments, agencies and localities, to address American infrastructure projects.
Should the program be implemented by Congress in any meaningful way, it would mean a boon for public construction projects and contractors. Contractors would be wise to keep a careful eye on this proposed legislation as it develops.
The Massachusetts Attorney General’s Bid Protest Unit (“AG”) recently decided that when an awarding authority seeks references not listed by the sub-bidder, it must give the sub-bidder the opportunity to respond when such reviews are negative.
In the case, the Barre Housing Authority (“BHA”) sought public bids for a panel replacement project. BHA checked the references for the low sub-bidder, but also reached out to an unlisted public entity for which the sub-bidder had previously performed work. That public entity gave the sub-bidder a negative review, which caused BHA to reject the low sub-bidder’s bid.
The sub-bidder filed a bid protest. Pursuant to Massachusetts public bidding laws the AG’s office conducted an investigation and held a hearing. The AG decided that while BHA reaching out to references not listed by the sub-bidder was not improper, by doing so they implicitly created an obligation to offer the sub-bidder a chance to rebut the negative reference.
The AG ordered BHA to reconsider its decision to reject the low sub-bidder, in light of the ruling. Should you have questions concerning your rights as a bidder, you’d be well-advised to consult with an experienced construction attorney versed in public bidding protests.
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.
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.
It is imperative that subcontractors and material suppliers seeking payment for completed work on federal-level public construction projects be aware of the paradigm of laws and policies that exist governing such matters. To start, The Miller Act, codified as 40 U.S.C. §§ 3131-3134, exists to provide subcontractors on federal-level public construction projects a means by which to secure their right to payment in an analogous manner to how M.G.L. c. 149, § 29 operates to provide Massachusetts subcontractors and material suppliers on state-level public construction projects a means by which to secure the same. Specifically, the Miller Act requires general contractors on federal projects to provide performance bonds and payment bonds to the awarding authority where the prime contract exceeds $100,000. (for a comprehensive overview of subcontractor Miller Act rights see, “Federal Subcontractors – Understanding the Basics of Your Rights Under the Miller Act.”).
While the legal framework behind federal-level public construction projects and state-level public construction projects often operate in tandem it is imperative to note that Federal law and Massachusetts law treat the enforceability of “pay-if-paid” and “pay-when-paid” subcontract clauses somewhat differently. This distinction is one that subcontractors need be wary of when entering into public construction contracts.
“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 the fraught distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects. See, 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. Thus, 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, particularly on Miller Act projects.
According to Federal Courts in both the First and Ninth Circuits, “the Miller Act is ‘highly remedial in nature,’ and should be construed and applied liberally to ‘effectuate the Congressional intent to protect those whose labor and materials go into public projects.’” United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., 783 F. Supp. 2d 294, 296 (D.R.I. 2011) quoting, United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199, 1209 (9th Cir. 2002). Furthermore, according to the reasoning of the Ninth Circuit, because the Miller Act itself conditions payment, not on whether prime contractor is paid, but rather, whether the subcontractor has performed AND whether the statutory amount of time to bring a Miller Act claim has passed, it then follows that the terms of the Miller Act trump subcontract “pay-if-paid” language absent a “clear and explicit” waiver on the part of the subcontractor. Of particular note, the Ninth Circuit, specifically states, and the District Court of Rhode Island, located in the First Circuit, specifically quotes, the following language; “A subcontractor that has performed as agreed need not await the Government’s payment of the contractor before initiating an action under the Miller Act against the contractor or the surety.” United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., (9th Cir. 2002); United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., (D.R.I. 2011).
The law is far from settled regarding the enforceability and distinction between “pay-if-paid” and “pay-when-paid” subcontract clauses on federal-level public construction projects. While there is some guidance on this issue in the context of the Miller Act, the distinction between the two clauses may still prove thorny for subcontractors seeking to enforce their right to payment. Thus, subcontractors should keep an eye towards the development of the law in this area as it is likely that more distinct legal trends will begin to emerge. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.
In a recent bid protest decision the Massachusetts Attorney General allowed a protest contesting a bidder’s right to submit Minority Business Enterprise (“MBE”) or Women’s Business Enterprise (“WBE”) qualifications after the bid opening. The opinion deemed MBE and WBE goals to be statutory and therefore not waivable by the awarding authority. The decision also found that allowing such post-bid submissions would violate the equal-footing principles upon which bidding laws rely.
The Fall River project required M/WBE compliance forms to be included with bids. The low bidder listed itself as an MBE in its bid. However, it soon learned that a change in the law made it no longer qualified to be a certified MBE. It then provided the city with the name of a qualifying subcontractor, albeit post bid opening. The city was willing to accept this post-bid supplement, however, another bidder filed a protest.
Generally speaking, cities may use their discretion in waiving their own public bidding requirements in certain circumstances. However, they are not authorized to waive statutory requirements. M.G.L. c. 7C, § 6(a)(6), enacted in 2013, provides that “state assisted construction contracts shall include language… setting forth the participation goals of minority and women workers to be employed on each such contracts.” Given the mandate of the “shall” language, the AG hearing officer found the M/WBE participation requirements to be statutory and therefore the city could not waive them.
The decision went further in finding that accepting the supplement post-bid would violate equal footing principles. An entity that already has the low bid will tend to have more leverage in negotiating prices with subcontractors and suppliers than competitors had pre-bid. Such advantages are not allowed.
Bidders should use caution going forward in verifying the current status of the M/WBE components of their bids and including thoroughly completed participation compliance forms in bid submissions.
In an opinion issued this week in N-Tek Construction Services, Inc. v. Hartford Fire Insurance Company, the Massachusetts Appeals Court ruled that a sub-subcontractor’s e-mail to a general contractor on a public construction project failed to clearly present a claim that would satisfy the notice requirements of M.G.L. c. 149, s. 29.
The unpaid sub-subcontractor on a public bridge painting project sent an e-mail to the general contractor that stated the following. “Enclosed is the January 15, 2010 Statement to [subcontractor] for services through that date by [sub-subcontractor] for the [project] that are still unpaid. Please give me a call at [telephone number] when you have a chance.” The attached Statement listed ten invoices. The general contractor’s project manager testified to having never heard of this sub-subcontractor prior to the e-mail, and did not understand the e-mail to be some form of claim.
M.G.L. c. 149, s. 29, requires parties that do not have a direct contractual relationship with the general contractor to provide written notice to that general contractor of any claims of non-payment within 65 days of last providing labor or material on the project. The statue merely requires that the notice state “with substantial accuracy the amount claimed, [and] the name of the party for whom such labor was performed.”
The Court’s opinion included a nuanced analysis of the purpose of this notice requirement. It held that the implied purpose is to give general contractors a clear, timely understanding that a claim is being directed against them. This is to allow an opportunity to attempt to resolve the claim prior to litigation and involvement of the payment bond surety.
In ruling against the sub-subcontractor, the Court looked at all of the circumstances surrounding the e-mail and deemed it inadequate, for failing to state “explicitly or implicitly” that the e-mail constituted a claim for an unpaid balance due on the project.
Sub-subcontractors and material suppliers on public construction projects in Massachusetts should consult with a construction attorney prior to sending 65-day notices to general contractors to insure the preservation of their payment bond rights.
Public construction projects are as necessary as they are numerous, which is to say very. Given that taxpayer money is at stake on these projects the state has an interest in regulating them from inception to completion to ensure that funds are spent efficiently. One specific statutory protection that Massachusetts provides at the inception of public construction projects is the competitive bidding requirement encompassed in MA G.L. c. 30, § 39M (b) (“Competitive Bidding Statute”).
The Competitive Bidding Statute serves to ensure that there is sufficient market competition for bids on public projects such that prices are kept low while the quality standards of the work remain high. The statute accomplishes this by requiring that public bids, “be written to provide for full competition for each item of material to be furnished under the contract; except, however, that said specifications may be otherwise written for sound reasons in the public interest.” It is important that contractors and subcontractors understand the implications of this statutory language so they are able to make fully informed and accurate bids.
The statute allows for two types of bids: competitive or proprietary. Competitive bidding is the norm and proprietary is the very narrow exception. The requirements of a competitive bid are that, “[f]or each item of material the specifications shall provide for either a minimum of three named brands of material or a description of material which can be met by a minimum of three manufacturers or producers.
Proprietary bids, or bids that do not meet the competitive bid standard, are allowed only if there are, “sound reasons in the public interest,” and only if those sound reasons are, “stated in writing in the public records of the awarding authority or promptly given in writing by the awarding authority to anyone making a written request therefor, in either instance such writing to be prepared after reasonable investigation.
In the case of both competitive and proprietary bidding, the awarding authority must allow contractors to submit alternative sources for materials that are the functional equivalents to materials described in the bidding document specifications. These are called equals. Specifically, “an item shall be considered equal to the item so named or described if, in the opinion of the awarding authority: (1) it is at least equal in quality, durability, appearance, strength and design, (2) it will perform at least equally the function imposed by the general design for the public work being contracted for or the material being purchased, and (3) it conforms substantially, even with deviations, to the detailed requirements for the item in the said specifications.”
The principal case on the matter of proper competitive bidding is E. Amanti & Sons, Inc. v R.C. Griffin, Inc. (2001). This case illustrates the importance of correct bidding practices by highlighting the financial consequences for violation of the Competitive Bidding Statute. In this case, the Massachusetts court made it clear that the distinction between proprietary and competitive bidding is meaningful and that subcontractors should not bear the burden of competitive bidding violations.
In this case, a subcontractor sought, and won reimbursement for, costs incurred when the subcontractor was forced to use a different and more expensive item than it included in its accepted bid. The specifications for the job required that the exhaust system be “as specified and manufactured by PlymoVent, or approved equal by the Fire Department.” The subcontractor’s accepted bid contained a different and less expensive exhaust system manufactured by a company other than PlymoVent.
While the “or approved equal” language gave the appearance of a competitive bid and led the subcontractor to believe that other exhaust systems could satisfy the specifications, in reality only the PlymoVent system could meet the architects requirements. The bidding authority did not make this fact clear to the subcontractor up front. Thus, the court held that form lost to substance, and the addition of the words “or equal” did not suffice for a competitive bid. The court determined that the awarding authority attempted to circumvent the statutory requirements for a proprietary bid by attaching the “or equal” language giving the false impression that competition was welcome. Ultimately, the court held that awarding authority had to bear the burden of the extra cost incurred by the subcontractor in reliance on the improperly proprietary bid.
Thus, it is imperative that contractors and subcontractors on public construction projects are aware of the Competitive Bidding Statute and its implications. Competitive bidding is the default unless the awarding authority explicitly indicates otherwise. Case law suggests the burden for improper proprietary bids should fall on the awarding authority. Nothing is certain, however, thus vigilance is key for contractors and subcontractors when it comes to bidding on public projects and that vigilance is bolstered by awareness of whether bidding documents are soliciting competitive or proprietary bids. If you have any questions about bidding on public construction contracts, you should contact a Massachusetts construction lawyer.