This week, the Massachusetts Supreme Judicial Court (SJC) heard argument on a Prompt Pay Act (PPA) dispute, J.C. Cannistraro, LLC v. Columbia Construction Co. The Cannistraro case comes on the heels of the SJC’s first decision construing the PPA, Business Interiors v. Graycor Construction. In Graycor, the SJC interpreted the “deemed approved” language from the PPA, holding that an owner or general contractor who fails to approve or reject an application for payment within the prescribed time period waives its common law defenses if it does not make payment before raising those defenses. The Cannistraro case presents new issues concerning the “deemed approved” language interpreted in Graycor.
In the case before the SJC, Cannistraro, the subcontractor, submitted an application for payment to the general contractor, Columbia. Columbia rejected the invoice as an overcharge but did not certify the rejection in good faith as required by the PPA. The dispute went to arbitration. The arbitrator first addressed the issue of whether Columbia violated the PPA by not certifying the rejection in good faith. Finding that a violation occurred, and therefore that the applications were “deemed approved,” the arbitrator required Columbia to pay the outstanding invoices. Only then did Columbia assert recoupment counterclaims on the grounds that the invoices were inflated. The arbitrator ultimately agreed with Columbia’s claim and ordered Cannistraro to repay about two-thirds of the amount it had received. After the arbitrator’s decision, the SJC decided Graycor, and Cannistraro sought review in the Superior Court. The Superior Court vacated the arbitration award, finding that the arbitrator exceeded his authority because the award violated the PPA, as interpreted in Graycor.
Cannistraro raises a number of issues about how to interpret the PPA and Graycor. First among them is whether counterclaims and contractual defenses (as opposed to common law defenses) are included in the Graycor rule, or whether they (unlike common law defenses) may be pursued notwithstanding the owner or general contractor’s failure to follow the PPA’s rejection procedure.
The SJC also grappled with the point at which a payor must pay the “deemed approved” invoices to raise defenses and counterclaims. At least one of the Justices commented that the arbitrator’s “order of operations” made sense—he first decided whether the invoices were “deemed approved,” then required the GC to pay the outstanding invoices, then allowed it to assert a recoupment counterclaim. There seemed to be some discomfort among the Justices with an ironclad pay-or-waive rule before even the assertion of defenses. Such a rule could result in a windfall to a subcontractor.
The SJC also must address the bounds of an arbitrator’s authority and when the Superior Court has the power to vacate an award. The parties and the SJC recognized the importance of finality—particularly in the construction industry—of arbitrations.
The SJC will issue a decision no later than mid-June. For now, all we know is that Graycor may have raised more questions than it answered, and the SJC’s decision in Cannistraro could shift or refine the balance of power between owners and general contractors, on the one hand, and downstream contractors, on the other, under the PPA.
