The recent New Jersey Appellate Court decision in the case of JPC Merger Sub LLC vs. Tricon Enterprises, Inc. (A-2893-21), has shed light on the enforceability of "pay if paid" provisions in the state. In this case, Tricon sought to enforce a "pay if paid" provision contained in a subcontract with JPC. This provision stated that Tricon's obligations to pay JPC would only be enforceable if Tricon had received payment from the owner of the project.
The court determined that the "pay if paid" provision was enforceable and that Tricon was obligated to make payments to JPC if and only if Tricon received payment from the third party. The court found that the provision was clear and unambiguous and did not contravene any public policy. The court stated, "we believe 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. Thus, we hold 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." This decision reinforces the principle that clear and unambiguous language in contracts is key and will be given weight by the courts in New Jersey.
In conclusion, after the JPC v. Tricon case, it appears that "pay if paid" provisions in New Jersey are enforceable, as long as they are clear and unambiguous. This decision serves as a reminder to parties entering into contracts in New Jersey to ensure that their agreements are clear and unambiguous, to avoid any disputes over enforceability in the future.
Good news for new / upstart businesses embroiled in litigation seeking lost profits as part of their damages. New Jersey has joined the ranks of the majority of states recognizing that there should not exist a "per se ban on claims by new businesses for lost profits damages . . .."
It has been the standard in New Jersey to bar claims for lost profits where same were remote, uncertain, or speculative. However, the Supreme Court has recently held that whenever a new or upstart business pursues a claim for damages of lost profits, such claims require a "fact-sensitive analysis of the evidence [to] decide whether plaintiffs can prove lost profits damages with reasonable certainty." In applying its new rule the Court explained: "if the trial court determines that plaintiffs' lost profits evidence is sufficient to establish their claim for damages with reasonable certainty despite plaintiffs' inexperience in developing [its new business], it should deny defendants' motions to bar the evidence and for summary judgment. If the court does not view plaintiffs' proofs to meet that test, it should grant defendants' motions and dismiss the complaints."
(Larry Schwartz v. Nicolas Menas, Esq. A-54/55-20)
A common practice in the construction industry is to hire independent contractors ("ICs") in lieu of hiring employees. The benefit of having ICs over employees is that an employer would realize savings on its workers compensation contributions. This practice can be legitimate if the ICs meet this state's ABC test.
In a recent Supreme Court opinion, an employer ultimately failed the ABC test for sixteen additional employees. This saga began subsequent to an audit of its business by the government. This employer was found to have more employees (sixteen more) than it was reporting. The business appealed and an Administrative Law Judge found it only had three additional, unreported employees. Upon review of the ALJ's decision, the Commissioner of the Department determined indeed there was sixteen additional, unreported employees. The Appellate Division got involved and determined there were only five additional, unreported employees. The Commissioner appealed that decision wherein the Supreme Court agreed that there were sixteen additional employees.
The ABC test has three prongs and all three prongs must be satisfied in order for a finding that the person is an independent contractor ("IC"). The test begins with the presumption that the IC is an employee, meaning the employer has the burden proof. 'Prong A' must show that the IC is not controlled or directed by the employer nor that the employer has reserved the right to assert control or direction over the person. 'Prong B' must show that the services performed by the IC are "outside the employer's usual course of business or that the service is performed outside of all of the employer's places of business." 'Prong C' must show that the IC will survive after the services rendered are completed or stated another way the IC will not "join the ranks of the unemployed" following completion of services.
(East Bay Drywall LLC v. Dept. of Labor and Workforce Dev., A-7-21)
Differing subsurface or physical conditions ("DSC") clauses are often contained in construction contracts to protect a contractor from unknown subsurface conditions encountered during construction. These clauses permit additional recovery by the contractor when such conditions are encountered after the start o f work. Conversely, exculpatory clauses are often found in construction contracts as well which protect owners from claims for additional compensation from contractors where the contractors bid the project without completing a sufficient due diligence investigation. In a recent unpublished opinion issued by the Appellate Division, the exculpatory clause stated that the contractor, "will not use any of the information made available to him ... as a basis or ground of claim or demand of any nature." In addition, the contract language made clear that the owner did not, "warrant or guarantee that ... conditions ... encountered during construction will be the same as those indicated," and that, "[e]ach bidder must inform himself fully of the conditions relating to the construction ... and in particular as to subsurface and groundwater conditions."
The contractor argued that the DSC clause governed and trumped the exculpatory clause. However, the court disagreed and held that both DSC and exculpatory clauses can validly co-exist in the same contract. Therefore, there was a question of fact as to whether the contractor could receive additional compensation for the subsurface obstructions that contract encountered after beginning the work. At trial, the jury found there to be no cause for recovery by the contractor, enforcing the exculpatory language of the contract. The contractor moved for a judgment notwithstanding the verdict, but this was denied by the trial judge and upheld on appeal. (Scafar Contracting, Inc. v. City of Newark)
New Jersey is considering assembly bill A571 which would create a new board of general contractors and require all general contractors in New Jersey to be licensed by the State. Currently, only certain licensed trades and residential home improvement contractors are required to be licensed. However, this would change under the pending legislation which would require all general contractors to be licensed by a brand new board of general contractors, even for commercial construction projects. The board would be charged with enacting the standards to be met in order to become a general contractor in New Jersey and they would also administer an exam which would have to be passed in order to become licensed. The licenses would be subject to renewal every two years and the contractors would also have mandatory continuing education requirements. As of now, the bill is not law and has only been introduced and referred to Assembly Regulated Professions Committee.
In New Jersey, members of a limited liability company who actively perform services on behalf of the company are deemed to be employees of the company for purposes of receipt of benefits and payment of workers' compensation insurance, but only if the company elects to purchase such coverage when the policy is purchased or renewed. This election may only be made at purchase or at renewal and may not be withdrawn during the policy term. Further, if there are multiple partners in the company, they all must either opt in or opt out. While many owners of LLCs do not elect to purchase workers compensation coverage for themselves, where a small to mid-size construction or manufacturing company is involved, they should consider doing so since the owners are often also in the field or on the manufacturing floor.
In a recent unpublished decision from the Appellate Division, an owner of a millwork company was struck by a steel rod, causing leg, knee and back injuries. However, despite the incident occurring in conjunction with the manufacturing of millwork, workers compensation benefits were denied due to the fact that the owners did not elect to include themselves on the workers compensation policy. Although they claimed to have asked for such coverage, and blamed their broker for filing out the form incorrectly, the Appellate Division still found that was insufficient to create liability for the insurance company where the application clearly indicated no coverage for the owners. (Kearton v. E.W. Millwork LLC)
Attorney Fee Awards under Prompt Payment Act are not Dependent Upon the Amount Recovered by the Contractor where the Fees are Otherwise Reasonable
In a published decision from September of 2021, the Appellate Division reversed a trial court’s award of $12,250.40 in attorney fees, opening the door for the Plaintiff to possibly recover the full $104,670.51 in attorney fees and costs that were incurred. The Plaintiff subcontractor had filed a Prompt Payment Act claim for $30,500, which the Defendant fought for two years all the way to trial. In accordance with prosecuting its case through to a trial, the Plaintiff incurred over $100,000 in attorney fees and costs. However, the trial judge reduced this figure to $16,375.73, finding that a fee award of over $100,000 would be unreasonable where the amount recovered was only $30,500.
The Appellate Division reversed this finding, and remanded to the trial court to revisit the attorney fee award. In doing so, the appellate court emphasized that to drastically reduce the amount of attorney fees to be recovered would work against the public policy behind the Prompt Payment Act in the first place stating:
The statute's salutary goals of ensuring that contractors and subcontractors are fully and promptly paid for their work are thwarted when such plaintiffs fully prevail on a suit to vindicate their rights under the Act but net little or nothing owing to the costs of the litigation. … Without the court's unstinting enforcement of the statutory fee-shifting provision, contractors and subcontractors with relatively small claims would win only a Pyrrhic victory against defendants who failed to discharge their statutory obligations to pay promptly what they owe. Instead of deterring owners and contractors from delaying payment or stiffing their subs as the Legislature intended, it would be the stiffed contractors and subcontractors who would be deterred from suing to vindicate their statutory rights.
(JHC Industrial Services LLC v. Centurion Companies Inc.)
Where an owner of a property sues a contractor in a construction litigation case, the burden of proof is upon the owner to both prove that the work was defective and what it will cost to have the defective work repaired. In an unpublished decision from February 2021, the Appellate Division noted that even without testimony from the contractor who prepared the repair estimate, the repair estimate may still be admissible as a business record exception to the rule against hearsay. The court noted that the repair estimate, "may have been admissible as a business record if: (a) the author prepared the document in the regular course of business, contemporaneously with its estimate, and not for litigation, (b) the business regularly made such estimates, and (c) the method, purpose or circumstances of preparation did not indicate that it was not trustworthy. Accordingly, while the better evidence would still be to bring in the contractor for live testimony, the court found that the trial court (among other things) should have at least considered if the estimate was admissible as a business record and therefore the case was reversed and remanded. (Olivera v. NJ Asphalt Services)
In an unpublished decision issued earlier this week, the Appellate Division reaffirmed that mere puffery regarding a contractor does not amount to an actionable statement under New Jersey Consumer Fraud Act. (“CFA”) The judgment had been entered against Jeff Sands (“Sands”), who met with the Plaintiffs as a result of them contacting Stanley’s Home Improvement LLC (“Stanley’s”). Sands took notes during the meeting, gave his sales pitch about the great work that Stanley’s did and the company’s terrific reputation, but indicated that someone else would be in touch with the Plaintiffs in order to give them a cost estimate.
After the Plaintiffs decided to hire Stanley’s, Fed Zappolo (“Zappolo”) met with Plaintiffs and provided them a cost estimate of $28,000. Although Zappolo introduced himself as Stanley’s foreman, the agreement given to the Plaintiffs to sign was with Zappolo’s company named Fred Allen Builders, not Stanley’s. When Fred Allen Builders failed to complete the work, the Plaintiffs contacted Sands who advised that he was no longer with Stanley’s and that they had gone out of business. Eventually, the Plaintiffs were forced to hire another contractor at a cost of $39,600 to complete the unfinished work and correct the deficient work.
The trial court entered a judgment against all of the defendants, including Sands individually, for over $200,000. Sands was the only party to appeal, and the court agreed that there was no basis to find that Sands violated the Consumer Fraud Act. The court noted that being an officer of a business entity, without more, does not amount to liability under the CFA. Instead there must be an affirmative act, knowing omission or administrative violation personally committed by an individual. Here, the court determined that Sands’ statements in his sales pitch that Stanley’s stood by their work, had a terrific reputation, etc. were mere puffery and did not provide a basis for liability under the CFA. Consequently, the over $200,000 judgment was vacated as to Mr. Sands. (Pellegrino v. Fred Allen Builders, et. al.)
A recent unpublished decision from the Appellate Division exhibits why caution should be used when incorporating prime contracts into subcontracts “by reference”. In this matter, a General Contractor ("GC") had an agreement with an Owner to construct two grocery stores. The prime contract between GC and Owner contained a forum selection which directed any disputes to be filed in courts in upstate New York. The GC subcontracted the electrical work to a Subcontractor (“SC"), but the subcontract had no such forum selection clause. Instead, there was language directing mediation for disputes in the same upstate New York locale, and further language that all disputes were to be, "settled according to the dispute resolution procedures in the Prime Contract."
As is unfortunately too common in the construction realm, SC completed work but was not paid. Prompting SC to file construction lien claims against the GC and Owner along with a lawsuits in the New Jersey counties where each property was located seeking damages under the Prompt Payment Act ("PPA") and enforcement of the construction liens. The Owner objected to jurisdiction in New Jersey based on the prime contract's language and incorporation into the subcontract. At the trial level, each judge held that the selected New Jersey venues were proper and rooted their decisions on the PPA's language whereby it states, such an "action shall be conducted inside of this State."
On appeal, the Appellate Court would not endorse a complete preclusion from contracting away venue selection. Instead, the appellate panel conducted an in-depth review of the language of both contracts, and noted that there was a great deal of ambiguity and confusion as to the terms of each. The court noted that the subcontract included a venue provision only for mediation and was silent as to the terms of any other form of dispute resolution if mediation was unsuccessful. While there was reference to the prime contract, the court found that the prime contract contained very little instruction for a how to resolve subcontractor disputes, and specifically focused on the resolution of disputes between the Owner and GC. To apply those terms to a subcontractor was nonsensical in the courts mind, and therefore the Appellate Division found there to be no forum selection clause in the subcontract as to litigation and permitted the two lawsuits to proceed. (Sal Electric Company, Inc. v. The Pike Co., Inc, et. al.)
Peter J. Vazquez, Jr.