Construction Insights

Recently, the New Jersey Appellate Division affirmed the Superior Court’s decision in Jersey Precast v. Enterprises, Inc. et al.  Particularly, the December 7, 2022, decision affirmed the lower court’s finding that a “pay-if-paid” clause in a material supplier’s purchase order with a general contractor was binding and enforceable. The court in Jersey Precast, acknowledged that New Jersey has no statute or published caselaw that addresses the enforceability of “pay-if-paid” clauses.  As such, the court relied upon the authorities and approaches of other jurisdictions.  For example, various courts in other states require such a clause to include clear and unambiguous language in order to for a “pay-if-paid” to be enforceable.  See e.g.  Main Elec., Ltd. v. Printz Servs. Corp., 908 P.2d 52, 528 (Colo. 1999) (stating “…the relevant contract terms must unequivocally state  that the subcontractor will be paid only if the general contract is first paid by the owner and set forth the fact that the subcontractor bears the risk of the owner’s nonpayment”); DEC Elec., Inc. v. Raphael Constr. Corp., 558 So. 2d 427, 429 (Fla. 1990) (stating risk-shifting provisions of a pay-if-paid term must be clear and unambiguous or, if ambiguous, interpreted as setting a reasonable time for payment). Moreover, at the federal level pay-if-paid clauses are typically enforceable where there is express contractual language that clearly demonstrates the intention of the parties to shift the risk of payment from the contractor to the subcontractor.  See Fixture Specialists, Inc. v. Global Construction LLC, 2009 WL 90431, at *4-6 (D.N.J. March 30, 2009).

Using the above standards as guidance, the Appellate Division in Jersey Precast, critically pointed out that in New Jersey freedom of contract is a “‘is a factor of importance'” within “the framework of modern commercial life.” See Whalen v. Schoor, DePalma & Canger Grp., Inc., 305 N.J. Super. 501, 505-06 (App. Div. 1997). It is a “settled principle that parties bargaining at arm’s-length may generally contract as they wish.” Id. at 505. To that end the court held that, “parties may make contractual liability dependent upon the performance of a condition precedent.” See Duff v. Trenton Beverage Co., 4 N.J. 595, 604 (1950).  The Appellate Division further articulated that a prohibition against the use of pay-if-paid provisions as conditions precedent in construction contracts should come from the legislature rather than the courts, and as such, held that as long as the contract specifies a clear and unambiguous intent and agreement by the parties to shift the risk of nonpayment, a pay-if-paid provision is enforceable subject to the parties’ implied duty to not frustrate conditions precedent to their performance.

Key Takeaways

We are proud to announce 11 of our attorneys have been named to the 2021 Best Lawyers® list, two of which were named “Lawyer of the Year.” This recognition in The Best Lawyers in America© 2021, identifies each for their leading legal talent in their corresponding practice areas.

The following Lindabury attorneys were named as Best Lawyers honorees:

Lindabury Construction law attorney Chloe Mickel authored an article for the American Bar Association’s Forum on Construction Law which examined the beneficial uses unmanned aerial vehicles (“drones”) can provide.

While drones are rapidly becoming more commonplace in both the consumer and business markets, the construction industry has been slow to integrate them into their day-to-day operations.   The benefits drone technology provides to those in the construction field include the faster completion of site surveys; the ability to monitor construction progress in real time and the capture of high quality, unique images for site marketing.

Read Chloe’s article, Despite Clear Benefits, the Construction Industry is Slow to Integrate Unmanned Aerial Vehicles into Projects, which was published in the Spring 2016 edition of the Forum’s newsletter, Under Construction.

“Don’t worry, our payment is secure because this is a public project with public funds. Right ?”

Yes and No. It is only secure if you complied with certain statutory pre-notice requirements!

When you supply materials, equipment or labor for a public project (i.e. “ a construction project paid for with public funds”), you have certain extra statutory remedies to help ensure you receive payment. These remedies go beyond the typical contract rights your business has against the party with whom you contracted. These remedies consist of:

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If the owner of a private, non-residential construction project in New Jersey defaults on making payment to the supplier of labor and or materials, one of the most important things that supplier can do is to file a Construction Lien to protect its rights and monies.

For example, if a supplier enters into an agreement with a prime contractor or subcontractor to provide materials on a project and that prime contractor or subcontractor goes out of business or files for bankruptcy prior to making payments, the supplier would be left with no recourse against the prime contractor or subcontractor. To the extent that the supplier, however, has filed a Construction Lien against the property, it could still recover its payments directly from the Owner of the project. In order to do so, a subcontractor/supplier should be aware and mindful of certain timing and procedural requirements that must be followed to file a valid Construction Lien on private property in New Jersey.

As an initial matter, a Construction Lien can only be filed by the following class of claimants on a construction project:

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Are You a Material Supplier or Are You a Bank? If You Extend Credit to Customers You’re Both

Does your business offer lines of credit to its customers? If so, are you approaching these transactions with the same caution as a bank?

To facilitate business transactions with regular customers, many equipment and material suppliers offer lines of credit. Before your business extends credit to a customer, it is important to think of the transaction in banking terms. Every time you provide equipment or materials to a customer on credit, you are lending that customer money. Essentially, you become a lender and the customer becomes your borrower. Ask yourself: “If I were a bank, would I provide them with a loan?”

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Two years into a large federal design-build project through the Army Corps of Engineers here in New Jersey, the owner shut down the project and terminated the general contractor for cause, citing its failure to keep to the schedule among other issues. Our client, a mechanical subcontractor with an almost $1.5 million contract on the project, was caught up in the dispute. As the project sat dormant for a year, our client faced years of litigation to collect payment on work performed, the possibility of receiving only a percentage of the payments not made, and the loss of the rest of the work on the project that needed to be done. The client was also concerned about its obligations under the contract and the warranties on expensive equipment purchased for the project as it sat idle.

Lindabury construction attorney Greg Vitali was contacted by the client to provide guidance in protecting the client’s interest and rights. Greg stepped in to perfect the client’s bond rights under the Miller Act, thereby providing the client with additional assurances that it would be paid the monies due on the project. He also successfully negotiated a ratification agreement with the surety and the completion contractor that (i) resulted in an increase in the contract price to compensate the client for the consequences of the delays, and (ii) limited the exposure of the client for warranty claims on materials and equipment that had not yet been accepted but had otherwise sat idle at the project for over a year and a half. Through the efforts of Greg and the other parties, the dispute was resolved to everybody’s satisfaction. The owner and the surety are now able to proceed with the completion of the project. Our client avoided years of litigation and delays in payment. Instead, he was able to get back to work, receive payment in full for work previously completed but not paid, and obtain necessary and critical protections from the consequence of the delay.

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