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In this blog, presented by SunRay Construction Solutions and Joshua Quinter, Principal, Offit Kurman, Attorneys at Law, we'll uncover essential strategies not only to secure your payments but also to speed up the payment process for your New Jersey projects.
Payment Issues and Leverage
Before we dive into the specifics, let's establish the fundamental concept of leverage in construction contracts. At its core, the construction industry operates on a trade-off between work and payment. The delicate balance between the owner and the contractor revolves around avoiding over-leverage. The owner aims to prevent paying more than the value of the work performed, while the contractor seeks to avoid excessive work before payment. When one side becomes over-leveraged, the two parties essentially become business partners, and that's something everyone wishes to avoid.
The Power of Knowing Your Remedies
One of the keys to navigating the complexities of construction contracts is knowing your available remedies. Don't find yourself in a situation where you're over-leveraged. The name of the game is leverage, and understanding your options is essential. Let's explore these options further.
Liens - Powerful Tools with Limitations
Liens are valuable tools in the construction industry, but they come with limitations. In New Jersey, for instance, three common types of liens are often encountered:
a. Construction Lien (Mechanic's Lien):
Construction lien, often referred to as mechanic's lien, serves as a potent tool for securing unpaid payments in the construction industry. In most cases, it must be filed within 90 days after the last work was performed on a project. These liens create a legal claim against the real estate owned by the project's owner for the outstanding balance on the contract. The mere presence of a construction lien on a property can make property owners uneasy, as it signals an unresolved payment issue and can affect their ability to sell or refinance the property. This adds a layer of urgency and pressure on parties to resolve payment disputes promptly, as failure to do so could result in the sale of the property to satisfy the lien.
b. Municipal Mechanic's Lien Claims (New Jersey):
Municipal mechanic's lien claims are unique to New Jersey and offer an added layer of protection for subcontractors working on public projects in the state. This remedy allows subcontractors to file a lien that effectively freezes the contract balance held by the project owner, typically a municipality. This means that the owner cannot disburse the contract balance until the lien issue is resolved. This freeze on funds adds significant pressure on the project owner to address and resolve payment disputes promptly, as it affects their ability to manage project finances and can lead to project delays if not resolved.
c. Judgment Liens:
Judgment liens are a different type of lien that can be used in various legal contexts, including construction payment disputes. These liens require a legal process and a court judgment in favor of the party seeking payment. Once a judgment is obtained, the lien can attach to any property owned by the defendant (the party ordered to pay) as a means to secure the payment. Judgment liens offer more flexibility in finding assets to attach and collect on, making them a powerful tool for ensuring that a judgment is satisfied. While they involve a legal process and court action, they provide a means to go after the assets of the party who owes the debt, which can be particularly useful when other payment remedies are ineffective.
Bonds - Third-Party Leverage
Bonds are another avenue for creating leverage in construction contracts. The most common types of bonds in the industry are:
a. Payment Bonds:
Payment bonds are a financial guarantee often used in the construction industry. They involve a third-party surety, usually an insurance company, agreeing to pay subcontractors, suppliers, and other parties if the principal on the bond (typically the general contractor or construction project owner) fails to make payments as required by the contract. Payment bonds are put in place to ensure that the various parties involved in a construction project receive the compensation they are owed. This creates pressure on non-paying parties, as the surety company is obligated to step in and cover the outstanding payments if necessary. Payment bonds provide financial security for those who contribute to the project.
b. Performance Bonds:
Performance bonds are typically required by project owners when they have concerns about the project's progress, quality, or completion. These bonds are a guarantee that the work will be completed according to the contract terms and specifications. If the contractor fails to meet their obligations, the surety company issuing the performance bond will step in to ensure the work gets completed as required. Performance bonds are not directly related to payment but indirectly affect payment, as they ensure that the project progresses as planned, which, in turn, impacts payment to contractors and other stakeholders.
c. Lien Bonds:
Lien bonds are used as a remedy to remove specific mechanics liens that have been placed on real estate. These bonds provide financial security for the owner against valid liens filed by contractors, subcontractors, or suppliers who claim they have not been paid for their work on the property. When a lien bond is issued, it essentially replaces the real estate as collateral, giving the lien claimants an alternative source of payment. This allows the property owner to clear the title of the property from the encumbrances of the liens, and it provides a resolution to the payment dispute that benefits all parties involved.
d. Maintenance Bonds:
Maintenance bonds are commonly used on larger construction projects. They ensure that the contractor, after receiving the final payment, will return to the site to complete any remaining tasks or address any deficiencies listed in a punch list. These bonds provide a financial guarantee that the contractor will fulfill their post-construction obligations, such as fixing minor defects, addressing warranty issues, and ensuring the project meets all the necessary requirements even after the final payment has been made. Maintenance bonds provide security to the project owner and ensure that the work is brought to a satisfactory conclusion.
Contracts - Crafting Leverage Points
Crafting contract clauses can be a powerful way to establish leverage in a construction contract. Key provisions to consider include:
a. Stop-Work Provisions:
Stop-work provisions in construction contracts grant parties the right to halt work if they haven't received payment according to the contract terms. These provisions are typically designed to protect the interests of contractors and subcontractors. When activated, work can be stopped without incurring penalties, providing a powerful mechanism for non-paying parties to apply pressure and seek resolution to payment disputes. This ensures that work is not continued until outstanding payments are addressed, incentivizing timely payments to keep the project on track.
b. Proof of Ability to Pay:
Some construction contracts include clauses that require one party to provide proof of their financial capability, especially in situations involving significant change orders or change order requests. These clauses help ensure that the requesting party has the financial resources to cover the additional costs associated with the changes. By requiring proof of financial capacity, the contract aims to prevent situations where one party might request changes that they cannot financially support, which could lead to payment issues and project disruptions.
c. Recovery of Interest and Attorney's Fees:
Contracts that include clauses allowing for the recovery of interest and attorney's fees provide a significant leverage point in the event of payment disputes. These clauses typically stipulate that if a payment dispute leads to legal action, the prevailing party can recover not only the original amount owed but also any interest accrued, and the legal fees incurred during the dispute resolution process. Such clauses create a financial incentive for parties to resolve payment issues outside of court, as they risk incurring additional costs if they end up on the losing side of a legal dispute. This can expedite the resolution of payment disputes and encourage timely payments.
Statutory Remedies - The Legal Framework
Statutory remedies are often dictated by the type of construction project. Federal public projects fall under the Miller Act, while state projects are governed by the "Little Miller Act." In New Jersey, there's also the New Jersey Prompt Pay Act, although it may not be as potent as other leverage tools.
Key Takeaway
In the world of construction contracts, having an upper hand is really important. Different tools like liens, bonds, contracts, and legal solutions can help apply pressure and ensure you get paid for your work. Knowing when and how to use these tools is where experience and legal know-how make a big difference. So, if you are looking at getting assistance, at SunRay, we can guide you through the complex world of construction contracts, making sure you get what you deserve with confidence.
