In this blog, presented by SunRay Construction Solutions and Joshua Quinter, Principal, Offit Kurman, Attorneys at Law, you can learn about the basic methodology that contractors, subcontractors, and suppliers in New Jersey can use if they are dealing with payment disputes while working on construction projects. You can use this guide to find out what are the steps that you should take if you are not getting paid.
Some Threshold Questions to Consider
When it comes to construction projects and contracts, it is never one size fits all. So, there are some threshold questions that you should consider while you are forming your contract for a project. These questions are:
a. How much is at stake and are there any counterclaims? – The first step you need to take is to analyze the contract and look for specific risks in that project. You will need to make some amends based on the risks involved. You also need to look out for counterclaims, because if they are there, then you will need to change your approach accordingly.
b. What kind of project is it? – Check whether it is a public project, private project, or a quasi-public project.
c. Do I have a good contract and what does it say? – Check how your contract looks and whether the terms included are favorable to you or not. Pay special attention if you are buying a project and using somebody else’s contract, which can be one-sided in some cases.
d. Do I have lien or bond rights? – Check the contract to identify if you have any lien or bond rights, which also depends on what type of project you are working on.
e. Is there an applicable prompt payment statute? – Most states, including New Jersey, have an applicable prompt payment statute which may be of value to you.
f. Are there any other practical considerations at stake? – Finally check for some other practical considerations as well so that you are not scrambling at the last moment or when you are heavily involved in a payment dispute.
Let’s discuss each of them in detail.
Amount at Stake and Counterclaims
Here are some things to consider with regards to amount at stake and counterclaims.
a. The ROI on a claim for payment matters – A key point to consider is what is the ROI on your payment claims. It does not make sense to spend $50 thousand to get $25 thousand. Although you may not know what the exact ratios would be initially, you need to keep it in mind because if you can’t get your attorney’s fees or most of your attorney’s fees back, then that is a business consideration.
b. Consider the other ‘non-financial elements’ – Next thing to consider is the value of non-financial elements like time value of money where in some cases, for example, it is better to get $25,000 now rather than get $30,000 after 18 months. Similarly, there is value for time away from business, for example, you get involved in litigation or payment claims, it takes time away from your work. Another non-financial element to consider is the plain and simple frustration of dealing with unexpected payment issues.
c. Is the work complete/and invoiced for? – One of the most obvious steps in the construction business is completing your work and sending an invoice for it. However, many times subcontractors or suppliers fail to send their invoice. You must remember that the obligation pay is triggered only when the invoice is sent.
d. Due Diligence – If you did not do your due diligence in the initial stages of the project, such as looking into the owner or general contractor, whether there are sufficient funds, etc., then do it as soon as possible.
e. Analyze any defenses and counterclaims – It is particularly important to understand the difference between defense and counterclaims. If you are dealing with a defense, then you can always discontinue the case and walk away. However, this is not possible when you are involved in a counterclaim. If you have been sued for counterclaim, then you will need the other party’s permission to walk away from the lawsuit. A case of counterclaim can be filed for defective work, delayed work, or liquidated damages.
f. Value of the payment claim versus value of the counterclaim – You need to look at the value of the payment claim versus the value of the counterclaim. If you are making a claim for $50,000 and you have a counterclaim for $250,000 and you believe there is some validity to the counterclaim, then it is better to think about it and then decide your approach.
g. Alternative avenues of recovery – Ideally, for construction companies, a good team comprises a good lawyer, accountant, bond person, insurance broker, and a good person at the bank. This team of valuable people can produce alternative avenues of recovery if required instead of going ahead with litigation or breach of contract.
The next point to focus on is understanding what type of project you are working on. This is important because in most cases, the type of project dictates the remedies available to you.
a. Public jobs can be defined as projects that have public owners like the government or quasi-governmental agencies, such as Depart of corrections, Department of Transportation, etc., or it could be any state agency like the municipality, county, etc. These project types typically use public money to make the payments.
b. Private jobs are exclusively owned and run in the private sector, such as building a shopping mall, or residential buildings, etc. These project types involve private money from private entities.
c. Quasi-public projects are typically projects where it might be a private entity, but it receives a lot of public funding.
So, what type of remedies do these various project types offer? Well, if you are working on a private project, you can file a breach of contract action and access construction lien rights and payment bond claims. Although payment bonds are not common on private jobs, you may find them if you are working big jobs.
If you are working on a public project, then you can make a claim for breach of contract, payment bond claim, and depending on specific statute, you can also make a mechanics lien claim.
Irrespective of what type of project you are working on, there may be alternative remedies depending upon specific facts of your case.
Consideration on Contract Review
When you are looking at your contract, here are some key items that you should pay attention to.
a. Is the contract written or oral? – The first thing to consider is whether you have an oral contract or a written one. Although a written contract which is not signed is enforceable, it depends upon fact sensitive analysis. One important reason you should know from the beginning whether you have an oral or a written contract is because your payment proofs differ.
b. Payment clause – Next thing you will want to do is focus on the payment clauses because it sets the outer boundaries like conditions precedent to payment, timing, etc. You need to pay attention to the language to understand whether you are dealing with a pay-if-paid clause, pay-when-paid clause, or neither of those clauses.
Pay-if-paid means you will be paid only once the people who must pay you get paid. A pay-when-paid clause means that they can delay the payment for a reasonable period and then they must make the payment. If neither of these clauses are mentioned, it may be net 30 or net 40 where they will need to pay you within 30 or 40 days regardless of whether they have received the payment.
c. Clauses providing for proof of financing – Most of the construction contracts will include a clause that allows you to ask for proof that the project owners have sufficient funding or financing to pay the bills.
d. Impact of lien releases and lien waivers – Lien releases and lien waivers are different. A lien waiver is something you might sign while entering into the contract wherein you are waiving all your lien rights. But a lien release is something you sign when you submit a payment application and want to get paid. Also, try to avoid general releases and pay close attention to the language used.
e. Change order approval process: Another clause you must watch out for is the change order approval clause. Check whether you need to get the change order approved, what is the procedure involved, etc.
f. Is stopping work an option? – Finally, check if the contract has a provision that allows you to stop work if you are not paid for a specific period.
Liens and Bonds
Below are the things to keep in mind with regards to liens and bonds.
a. Construction liens are applicable on private projects. But, if you are working on residential projects, there is an extra statutory requirement that you need to follow as compared to commercial projects.
b. If you are working on public projects, then payment bond claims are applicable.
c. New Jersey offers a unique remedy which is the municipal mechanics lien claim. Typically, when you file a mechanics lien, it is placed on the real estate on which the job is being built; however, in New Jersey, when you file a municipal mechanics lien, the lien is placed on the public funds. This provision is not available for general contractors but rather for people down the chain of privity.
It is considered a valuable tool because it puts the public entity on notice that you are not being paid and they then freeze the account which has the money to pay the general contractor until the payment dispute is resolved.
d. Each of the remedies provided has their own set of notice requirements and timing elements. So, if you know you may not get paid, you must act immediately because the notice timings dictate when you can file and what the filing deadlines are, such as 30, 60, or 90 days.
e. Do not waive away your lien rights! Your lien rights are one of the most effective ways of ensuring that you get paid, so do not give up on the rights and remedies that are available to you.
Prompt Pay Statutes
Next thing you want to consider is the prompt pay statute. New Jersey’s prompt pay stature for private projects is not extremely helpful, so what you can do is look at the prompt pay statute of another state and write the terms of that statute in your contract. There is no harm in mirroring the language of another state’s prompt pay statute.
The Miller Act is applicable to most of the federal public work, and it provides for payment of penalties, interests, and attorney’s fees in specific circumstances if you are not getting paid. Usually, the standard terms that get paid for those extra damages show some sort of bad faith.
All states including New Jersey have the Little Miller Act which is applicable to state public work, and they work like the Federal Miller Act.
The final item you need to check regarding prompt pay statutes is your choice of law provisions in the contract. For example, if you are working in New Jersey and you are working for someone who wants Nevada’s law to apply, then the Nevada prompt pay statute may apply. In such cases, you must thoroughly read the prompt pay statute to have an idea of what provisions will work for you.
Other Practical Consideration
Finally, here are some other practical considerations.
a. Whether potential defendants are solvent – Research and find out if the potential defendants, such as the owner or general contractor whom you are suing are solvent or not. If you are dealing with payment bonds and sureties, then they are usually solvent.
b. Litigation history of the adverse party – It is recommended that you check the litigation history of the adverse party even before you sign the contract. Because if you are dealing with someone who has a long history of arguing over the contract balances in court, not settling them, etc., then you should be prepared that the process to be expensive, time consuming and frustrating. It is okay to work with such people, but just ensure that you know what you are walking into.
c. Your own resources and potential issues with public exposure – Next you need to evaluate your resources and determine how much money and time you want to spend. You also need to evaluate whether you are okay if any problems arise due to public exposure of the case.
d. Personal risk tolerance levels – Evaluate what your personal risk tolerance levels are. Some of you may be very risk averse when it comes to litigation while some of you are willing to take the risk and go ahead with the litigation.
e. Documentation and evidence – Your claim documentation and evidence are extremely crucial, so you need to not only evaluate them thoroughly but also be able to prove them when required. Also, it is highly recommended that you think of a proper way to document all your files.
f. Do you have willing witnesses – Finally, check whether you have any third-party witnesses who are willing to testify if required. If you have someone unwilling and unsure in court, you may not have a compelling case.
We hope this detailed guide helps contractors, subcontractors, and suppliers in New Jersey enhance their knowledge on how to ensure that they get paid successfully.