The Massachusetts Supreme Judicial Court has issued a decision clarifying payment obligations when there is a dispute between owner and contractor or between contractor and subcontractor. In short, if there is no timely rejection of the requisition/invoice, payment must be made in order for the payor to retain its right to defenses against the payee.

Graycor was the general contractor for a movie theater project in Boston, underway when Covid-19 intervened. The project stalled and the project owner apparently went out of business leaving Graycor unpaid. Graycor, in turn, failed to pay several subs and vendors.

Critical to the prompt payment law requirements, Graycor had an obligation to timely reject any sub or vendor invoice. It did not do so (putting aside for this discussion whether there was any basis for rejecting the invoices, such as failure to properly or timely perform work).

Based on a prior Appeals Court decision, the sub argued that (a) Graycor’s defenses to payment had been waived, and (b) the sub was entitled to immediate judgment on the unpaid amounts. The Mass. SJC did not agree. But it did hold that payment of the amounts sought and not timely disputed must be made as a condition of asserting any defenses to payment. Thus, any owner or GC who fails to timely object to or reject a payment application must pay the amounts sought as a condition of asserting any defense to the amounts due – breach of contract, improper performance, and the like.

For example: A sub performs shoddy work, bills the GC for that work and the GC fails to timely object to or reject the sub’s invoice. The sub then files a lawsuit. If the GC does not make payment of the sub’s invoices, the GC will not be able to assert its defense arising from the shoddy work and will not be able to recoup amounts paid to cover the damages incurred.

This is a critical decision that puts more teeth into the prompt pay act requirements. Owners and GCs will be at greater legal risk for failing to timely follow the steps under the prompt pay law.

One justice dissented in part, arguing that the majority had put too much stock in the concept of waiver of defenses for failure to make payment (when there was no timely objection/rejection). But the majority has spoken, and project owners and general contractors for private projects in Massachusetts (>$3 million) must take note.

Finally, the SJC also held that the amounts due should not be the subject of an immediate entry of judgment, which was one of the outcomes of the prior Appeals Court decision. That procedural distinction may aid in defense of payment claims, but the requirement to make payment in order to assert legal defenses will remain.

The case is Business Interiors Floor Covering Business Trust v. Graycor Construction Company, Inc., ___ Mass. ___ (June 17, 2024).