Today, many contractors and material suppliers continue to feel the blow of the "Great Recession" as they struggle to find new work or get paid for work they have already completed. Contractors and material suppliers are increasingly finding themselves in payment disputes and are forced to agree to take a "haircut" off the original contract price fearing that a drawn out law suit will cost more money in attorney's fees and in costs of a litigation. However, New Jersey amended legislation to not only deter such non-payment, but to also ensure contractors and material suppliers get paid timely. Furthermore, the amended legislation attempts to remove a contractor's hesitation in bringing an action for non-payment based on the potential legal costs associated with such an action. Contractors and owners that find themselves involved in a payment dispute must be aware of New Jersey's Prompt Payment Act (the "Act"). [1]
On September 1, 2006, New Jersey amended the Act to include private construction contracts in addition to public construction contracts. The Act now affords greater protections to prime contractors (which includes architects and engineers), subcontractors, sub-subcontractors and suppliers by providing deadlines for payment and severe consequences for unreasonably withholding payment. "Prime contractor" is defined as "a person who contracts with an owner[2] to improve[3] real property." "Subcontractor" is defined as "any person who has contracted to furnish labor, materials or other services to a prime contractor in connection with a contract to improve real property" and "Subsubcontractor" means "any person who has contracted to furnish labor, materials or other services to a subcontractor in connection with a contract to improve real property."[4]
The Act provides in relevant part that for prime contractors, the owner must "pay the amount due to the prime contractor for each periodic payment, final payment or retainage monies not more than 30 calendar days after the billing date, which for a periodic billing, shall be the periodic billing date specified in the contract."[5] Importantly, if an owner does not object in writing to the amount of the invoice (or any portion of the invoice) and provide a reason for such objection, then the invoice "shall be deemed approved and certified 20 days after the owner receives it ..."[6] This provision creates a presumption that the invoiced work was substantially completed pursuant to the contract on the 21st day after receipt of the invoice by the owner. In other words, the owner may waive any defense of failure to complete the work in accordance with the contract by not timely objecting, in writing, to the invoice within 20 days of receipt.
The Act also provides protections to lower tier contractors and provides that the prime contractor pay subcontractors, sub-subcontractors and materialmen within 10 days of completion of work (unless otherwise agreed in the written contract). The Act provides in relevant part that if the subcontractor or sub-subcontactor has performed in accordance with the provisions of its contract with the prime contractor or subcontractor and the work has been accepted ...the prime contractor shall pay to its subcontractor and the subcontractor shall pay to its subsubcontractor within 10 calendar days of the receipt of each periodic payment, final payment or receipt of retainage monies, the full amount received for the work of the subcontractor or subsubcontractor based on the work completed or the services rendered under the applicable contract.[7]
This section of the Act provides a different remedy to subcontractors and suppliers than the "invoice is deemed approved" remedy available to prime contractors for non-payment by the owner. Here, if the prime contractor or subcontractor withholds payment without providing the reasons for doing so in writing, then the party who is not paid may have the right to suspend performance under the contract without penalty. Indeed, the Act provides that the prime contractor, subcontractor or subsubcontractor may, after providing seven calendar days' written notice to the party failing to make the required payments, suspend performance of a construction contract, without penalty for breach of contract, until the payment required pursuant to this section is made, if the contractor, subcontractor or subsubcontractor: is not paid as required by this section; is not provided a written statement of the amount withheld and the reason for the withholding; and the payor is not engaged in a good faith effort to resolve the reason for the withholding.[8]
Owners or contractors that violate the Act shall be liable for (1) interest of a rate of prime plus one (1) percent if payment is not timely made;[9] and (2) reasonable costs of litigating and attorney's fees to the prevailing party should the dispute be litigated.[10] Furthermore, disputes regarding violations of the Act may be submitted to alternative dispute resolution, thus speeding up the dispute process.[11]
Since 2006, however, there are only two decisions that analyze the Act.[12] In both cases, the court found that the Act had been violated and awarded the plaintiff interest, reasonable cost and attorney's fees, setting good precedent for the Act's use. The scant case law on this subject in New Jersey leaves a lot open for interpretation. However, one thing is clear based on the two cases cited in this article - if you violate the Act, you may be liable for interest on any amount not paid, reasonable costs and payment of your adversary's attorney's fees.
[2] "Owner" is defined as "any person, including any public or governmental entity, who has an interest in the real property to be improved and who has contracted with a prime contractor for such improvement to be made. 'Owner' shall be deemed to include any successor in interest or agent acting on behalf of an owner." N.J.S.A. 2A:30A-1
[3]Improve" means is defined under the Act as to build, alter, repair or demolish any structure upon, connected with, on or beneath the surface of any real property; to excavate, clear, grade, fill or landscape any real property; to construct driveways and private roadways on real property; to furnish construction related materials, including trees and shrubbery, for any of the above purposes; or to perform any labor upon a structure, including any design, professional or skilled services furnished by an architect, engineer, land surveyor or landscape architect licensed or registered pursuant to the laws of this State. Id.
[5] N.J.S.A. 2A:30A-2(a).
[7] N.J.S.A. 2A:30A-2(b).
[8] N.J.S.A. 2A:30A-2(d).
[9] N.J.S.A. 2A:30A-2(c).
[10] N.J.S.A. 2A:30A-2(e).
[12] Shore Mechanical Contractors, Inc. v. W.G. Osborne Construction, LLC, 2008 WL 4107985 (N.J.Super.A.D.) (discussing arbitrability of Prompt Payment Act and finding that the subcontractor could recover interest, costs and attorney's fees for violation of the Prompt Payment Act) and Structural Steel Fabricators, Inc. v. Consolidated Systems, Inc., 2010 WL 4608232 (N.J.Super.A.D.) (also discussing arbitrability of Prompt Payment Act and finding that the subcontractor could recover interest beginning on the day following the date payment was due [plus] reasonable costs and attorney's fees for violation of the Prompt Payment Act). |
