This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
For experienced builders, it’s no secret: Construction has a payment problem.
Overdue invoices and late payments can stymie a builder’s growth and force contractors to dip into their coffers to keep the lights on. In 2022, for example, late payments cost the U.S. construction industry $208 billion.
But now, a new ruling out of Massachusetts helps clarify how contractors and subcontractors can navigate payment disputes while fulfilling contractual and legal requirements. The ruling could also offer insights into how these situations play out in other states.
The June 26 Massachusetts Supreme Judicial Court’s ruling underscored how contractors need to follow the letter of the law when withholding disputed payments, say legal experts. However, the case also points to a broader lack of understanding around prompt payment laws in construction in the first place, attorneys say.
The Massachusetts ruling
In the Massachusetts case, contractor Columbia Construction received invoices from its subcontractor, J.C. Cannistraro, for $925,000 in disputed change order work.
Columbia rejected the invoices, but did not fulfill the good-faith certification requirement for nonpayment under Massachusetts’ Prompt Pay Act, according to a blog post from Matthew Madden, partner at law firm Bowditch & Dewey. As a result, the invoices were deemed approved and Columbia eventually paid them.
However, Columbia then sought to recoup part of those payments in arbitration. The arbitrator decided $577,000 of those costs were in fact not fair and reasonable, Madden wrote, and awarded Columbia partial recoupment.
After some more legal wrangling, the state’s Supreme Judicial Court ultimately upheld the arbitrator’s ruling.
Madden told Construction Dive in an interview that despite Columbia’s victory, the case hinged on the contractor failing to fully comply with the state’s prompt payment law in the first place.
“Although the court ultimately allowed Columbia here to recoup the sums and affirm the arbitrator’s decision, it did affirm that its initial rejections didn’t comply with the statute, so it doesn’t excuse prompt pay compliance,” Madden said.
On the other hand, the ruling also means that the subcontractor didn’t get an undeserved payment, said Timothy Hegarty, partner at New York-based law firm Zetlin & De Chiara.
“I think it's certainly a good decision,” Hegarty said. “It reflects, I think, common sense, because the arbitrator basically prevented the subcontractor from getting a windfall. As it turns out, the subcontractor could not justify the amount that they requisitioned.”
Prompt payment legislation exists almost everywhere in the U.S., with a few notable exceptions. On public projects, for example, nearly every state in the U.S. has laws on the books, per construction payment platform firm Levelset, with fewer states containing legislation for private jobs.
The laws themselves are not overly complicated, Hegarty said. But because each state has its own laws, builders need to keep up with their individual nuances.
New Jersey, for example, stipulates a mandatory payment of attorney’s fees if the contractor wins. That provision does not exist in New York, Hegarty said.
Mind the consequences
Ultimately, court rulings like the one from Massachusetts can help builders understand prompt payment requirements, Hegerty said. Legislators who write these laws can’t account for every real-world dispute, because facts can differ significantly from project to project. A $1 billion data center, for example, will not have the same issues as a $75 million community center.
So what can contractors glean from this case? Trent Cotney, partner and construction team leader in the Tampa, Florida, office of law firm Adams & Reese, advised builders to take particular care when denying payment of an invoice. In this case, Columbia did not provide the good-faith component of its rejection as required under Massachusetts law, so the firm was liable to pay.
“You have to be very careful about when you’re rejecting something merely for a technical-level issue,” Cotney said. “We see a lot of this done by general contractors, where they are looking for reasons to reject payment applications, and you end up in a 90-, 120-day process to get paid because they’re coming up with every little failure to cross a T or dot an I.”
Cotney said the case provides a good example for why builders and their attorneys need to brush up on prompt payment laws.
“I think a smart contractor or subcontractor is aware of this statutory framework, that even though it’s not necessarily in the contract, it’s as much a part of the contract as the contract documents,” Cotney said.
On the other hand, these projects are not a way to “create a lottery ticket,” Hegarty added.
“In other words, if you know that your client is slow on their paperwork and you did $100,000 worth of work, it’s borderline fraud, if you will, to submit a requisition for $200,000 hoping that your client doesn’t timely approve it,” Hegerty said.
Builders’ next steps
So, what can builders do to protect themselves in these events? Or better yet, avoid getting into these disputes in the first place?
Attorneys say the best approach is to pay first and fight later, unless there’s a good reason not to. To that end, the ruling shows that contractors need to keep an eye on compliance, even if they plan to dispute these payment requests in the future.
“In looking at it, I think the gist of it is you shouldn’t assume that if you withhold payment even while you’re disputing the merits, that’s necessarily going to absolve you from any potential liability,” Cotney said.
Builders also need to understand and brush up on prompt payment laws in their respective states.
“Some contractors remain unfamiliar with its terms and its requirements, and that’s why we try to counsel all of our clients as to what’s required and how they can comply with it,” Madden said.
