The SJC concluded that, under the Prompt Pay Act, a party does not automatically waive all common-law defenses by failing to approve or reject an application for payment as required by the statute. However, the SJC concluded that in order to preserve its common-law defenses, a contractor that failed to approve or reject an application for payment in accordance with the statute must: (1) make payment of the “deemed approved” invoice to the subcontractor; and (2) raise its defenses prior to or contemporaneously with the payment of the invoice.

The contractor in Graycor did not follow this approach; even after invoices were “deemed approved” under the statute, the contractor “sought to raise and pursue defenses without ever paying the invoices.” According to the SJC: “This it cannot do.”

Although the SJC “emphasized” that the Prompt Pay Act “does not expressly preempt all common-law defenses to breach of contract,” the SJC stated that “payment of overdue approved invoices must be made prior to, or contemporaneous with, raising common-law defenses, or the defenses cannot be raised.” According to the Court, this “reading of the statute is a necessary implication of it” in order for the statute to have “meaningful consequences” for those who fail to comply with its requirements. Otherwise, “[a]llowing common-law defenses to be raised and pursued without paying the now ‘deemed to be approved’ invoices would render this approval to be of no import.”

Key Takeaways

1. For contracts subject to the Prompt Pay Act, the decision underscores the importance of complying with the statutory timelines and procedures for approving and rejecting applications for payment and change order requests in the first place. Compliance with the statute places a contractor in the best position to preserve its rights, claims, and defenses whereas noncompliance with the statute leads to approval of the application for payment or change order request by operation of law. Once that happens, the amounts become due and payable and the contractor that failed to comply with the statute cannot expect to withhold payment and still have the ability to assert common-law defenses to payment.
2. If there has been a failure to comply with the statutory requirements, all is not lost. In addition to paying the “deemed approved” amount, contractors should assert all known defenses (prior to or with the payment), incorporate and assert all available defenses under the contract, common-law, statute, or otherwise, and also reserve their rights.
3. Although the Court focused on common-law defenses, the safer approach is to treat the decision as applicable to all defenses, including contract defenses. In this regard, the SJC stated that a party that fails to timely approve or reject a payment application under the statute “must first make the payment in order to pursue any defenses in a subsequent proceeding . . . .” (Emphasis added).
4. Remember also that the Prompt Pay Act applies to other contracting parties as well, including owners and subcontractors. As a result, even though the Graycor case involved a contractor’s failure to pay an application for payment, the reasoning of the Graycor case is not limited to that scenario.