Litigation
Court to General Contractor: Too Late to Reclaim $600K Sub Overpayment
Massachusetts prompt-pay decision worries prime contractors
Work on the Siemens Healthineers' Advanced Manufacturing and Research & Development Facility, an ENR Best Project selection for 2020, led to a controversial payment court case between the prime contractor and a mechanical subcontractor.
Massachusetts contractors and their attorneys are once again testing the limits of the state's 15-year-old prompt-pay law, with concerned prime contractors asking an appeals court to overturn a lower court ruling that they believe gives subcontractors a powerful upper hand in payment disputes.
Following a hearing held on Feb. 2, state Supreme Judicial Court judges must decide a complex matter: whether an arbitrator exceeded its authority by allowing a general contractor to claw back payments to a subcontractor, ordered by the arbitrator, after the general contractor initially missed deadlines required by the state's prompt-pay law for justifying holding back the payments.
From an owner or general contractor's point of view, the ruling would mean that once a general contractor denies requested payments without explaining why, then makes the payments but later wins a judgment that reduces the amount it owes, the owner or general contractor can't get any money back.
There is a second issue before the appeals court: did a state court judge that had ruled that the arbitrator overstepped its authority and vacated the arbitrator's decision undermine arbitration in Massachusetts?
"The outcome could profoundly influence payment practices on private projects exceeding $3 million" that are covered by the state law, wrote attorneys with Cole Law Partners. It is representing Waltham, Mass.-based J.C. Cannistraro, a plumbing and mechanical contractor, in its dispute with Boston-based Columbia Construction Co.
Columbia's attorney, arguing before the Supreme Judicial Court panel, said the heart of the matter was the overturning of the arbitrator's second decision allowing Columbia to recoup some of what it had paid Cannistraro. The appeals panel should reverse the lower court because "the most important thing in front of the court here in our view is to make sure that we are protecting the sanctity of arbitration," argued Jeff D. Bernarducci, partner in law firm Hinckley Allen.
The two contractors had worked together as prime and sub on the Siemens Healthineers' Advanced Manufacturing and Research & Development Facility, in East Walpole, Mass.
That $310-million project renovated five buildings, made additions to two others and built one new structure. The work created new offices, warehousing, labs, clean room manufacturing areas and cold storage rooms.
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Amicus briefs on the appeals case have been submitted by the Associated General Contractors of Massachusetts, the Associated Subcontractors of Massachusetts and the Real Estate Bar Association.
Ever since its adoption by state lawmakers in 2010, the Massachusetts prompt-pay law has established protocols for pay applications. But details still are being revised.
The Supreme Judicial Court clarified some aspects of the law in 2024, when the judges ruled that a prime contractor must explain why it is withholding subcontractor payments or lose its right to dispute them.
The current case is different. According to a blog post by attorneys with law firm Anderson Kreiger, Cannistraro proposed two change orders totaling about $1 million to Columbia Construction, which denied the payments.
Cannistraro then filed a lawsuit in state court against the general contractor, and after Columbia had replied to the lawsuit, a trial court judge ordered arbitration.
The arbitrator ruled that Columbia had failed to certify that it rejected the payment in good faith, as required by the state prompt pay law, and ordered Columbia to pay the full amount of Cannistraro's invoices. The general contractor made the payments.
Arbitrator: Return $600K
About 18 months later, after hearing evidence about the merits of the project's various charges and costs related to the change order, the same arbitrator ruled that Cannistraro had inflated its costs by $600,000 and ordered the sub to pay back that amount to Columbia.
Cannistraro appealed the arbitrator’s award to the Superior Court, arguing that the arbitrator improperly exceeded its authority under state law in ordering the return of the money. The subcontractor claimed that Columbia forfeited its rights to challenge payment of the full value because Columbia had asserted defenses in the initial lawsuit and arbitration before finally making payment in full.
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The state Superior Court agreed with Cannistraro that it was too late for Columbia to get the money back.
The Anderson Kreiger attorneys, who are not involved with the case, summarized the court's logic. Columbia, they wrote, under the state law effectively waived challenges to regain any of its payment "by asserting its defenses when the suit was filed, and not actually paying the 'deemed approved' invoice amounts until two years later."
If that ruling stands, the Anderson Kreiger attorneys wrote, the state prompt-pay law "has become a blunt instrument against owners and upstream contractors who do not strictly follow the payment procedures of" the law.
Arguing for Cannistraro, Cole Law Partner Nathan Cole emphasized that Columbia's "delays—resulting in a two-year wait for over $950,000 in payments—violated" the state prompt pay law's intent.
"That sequence is far from 'prompt payment,'" wrote Cole, "and we believe the trial court correctly ruled."
