On Massachusetts public building projects, subcontractors who file sub-bids or who are approved in writing by the public owner are eligible under M.G.L. c. 30, 39F to receive direct payments from the owner for work they perform.
An eligible subcontractor may demand both direct periodic and final payments. Direct periodic payment may be sought where the contractor obtains payment on account of the subcontractor's work and does not pass it along, or where the contractor fails to include the subcontractor's work in its application for payment to the owner.
A direct final payment may be sought if the subcontractor does not receive payment within seventy days after it substantially completes. The procedure for demanding direct payment is simple. A subcontractor need only send a letter to the public owner stating a detailed breakdown of the balance due under its subcontract and the status of subcontract completion, and send a copy of the letter to the contractor. The letter must be sworn to and notarized, and must be sent by certified mail to the owner and the contractor.
The procedure by which a contractor may object to the owner making a direct payment is equally simple.
If the contractor disputes the subcontractor's claim, it need only send a letter to the owner within ten days stating its detailed breakdown of the subcontract balance. The contractor's breakdown, like the subcontractor's, must be sworn to and notarized. If the contractor does not dispute the subcontractor's breakdown within ten days, then the owner is obligated to pay the subcontractor its balance, less any amount the owner is withholding for incomplete subcontract work. If the contractor disputes the entire balance claimed due, the owner is statutorily obligated to deposit the entire balance into an interest bearing joint bank account in the name of the contractor and the subcontractor. The bank must hold those funds until it is notified of a settlement between the contractor and subcontractor, or receives a court order directing payment to one of the parties.
If the contractor disputes only part of the balance, then the owner must pay the subcontractor the admitted balance, and deposit the disputed balance into an interest bearing joint account.
All direct payments to subcontractors and all deposits of disputed balances into joint bank accounts come exclusively from amounts held by the owner that are otherwise payable under the general contract. To the extent there are funds due or to become due under the general contract and the owner makes a direct payment or deposit, the entire amount paid or deposited is credited against the general contract price and deducted from future payments to the contractor. If no amount is due the general contractor when the subcontractor's demand for direct payment is filed, and no amount later becomes due, then the owner has no fund out of which it can make a direct payment or deposit, and is under no obligation to the subcontractor to take any action. But if the owner ignores a subcontractor's demand for direct payment where there are amounts remaining under the general contract, and continues to pay the contractor, that owner would be responsible for the subcontractor's balance even though the owner no longer holds general contract funds.
The direct payment statute benefits subcontractors because it provides a means of facilitating payment where the contractor withholds payment without grounds. The ability to make direct payments to subcontractors, and charge those payments against the general contract price, benefits the owner because it enables an owner to keep payments flowing to subcontractors and to avoid possible work stoppages. Direct payments do not harm contractors because they are limited to payments otherwise due subcontractors, and, where no amounts are due, the contractor may prevent a direct payment through a timely response.
Any abuse of the direct payment statute by a subcontractor making a false claim or a contractor making a false objection is subject to severe economic penalty. M.G.L. c. 93A, §11 makes unfair or deceptive business practices unlawful, and penalizes such conduct by awarding multiple damages and attorney's fees to a party victimized by such practice. (See Construction Law Comments - Fall 1992).
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