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New Jersey Expands Prompt Payment Law for Construction Contracts
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September 25, 2006
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By Robert J. MacPherson
Thelen Reid Brown Raysman & Steiner LLP
New Jersey has amended its prompt payment statute governing construction contracts, NJSA 2A:30A-1 and 2. Amendments apply to both public and private work. Besides setting specific times within which payment must be made for construction work, the statute now makes New Jersey the exclusive venue for payment disputes involving construction projects in New Jersey. Prevailing parties in such actions are entitled to award of attorney fees.
The statute covers payments due prime contractors, defined as a person who contracts with an owner to improve real property, down through second tier subcontractors and suppliers. Improving property is broadly defined and includes the services of licensed professionals.
Payment requests are known as a “billing” under the statute and are defined by the parties' contract. A billing includes periodic payments, final payments, written approved change orders and requests for release of retainage. If a prime contractor has performed in accordance with the contract with the owner and the contractor's billing has been approved, the owner must pay the amount due within 30 days of the “billing date” as specified in the contract. Billings are deemed approved 20 days after receipt unless the owner, within 20 days of receipt of the billing, provides the prime contractor with a written statement of the amount withheld and the reasons.
A public owner whose governing body must vote on authorizations to make payments may provide in its bid specifications and contract documents that billings will be voted on at the next scheduled meeting and paid during the subsequent payment cycle. If only a portion of the work is considered unacceptable, payment may be withheld for the reasonable value of that portion only.
Prime contractors are obligated to pay subcontractors, and subcontractors must pay sub-subcontractors within 10 days of receiving payment unless the parties have provided otherwise by written contract. The amount paid must be the full amount received for the work of the subcontractor or subsubcontractor. Partial payments for ongoing projects are payable only if the payee is performing to the satisfaction of the payor. Unlike owners, prime contractors and subcontractors withholding payments are not under a specific obligation to provide a reason for the withholding, but if they do not, the party who is not paid may have the right to suspend work until paid.
A party not making timely payment is liable for interest on the amount due at the prime rate, plus 1 percentage point.
The right to suspend work if not paid is not absolute. In addition to not receiving a payment, the party looking to suspend work also must not have gotten a written statement of the amount withheld and the reason. And, the payor must not be “engaged in a good faith effort to resolve” the dispute. What constitutes a good faith effort is not defined. A party intending to suspend work must provide seven days written notice of its intent to do so. The section of the statute governing the right to suspend work does not apply to certain federally funded transportation projects.
The statute makes several references to the parties' contract but does not mandate that the parties have a written contract. It does, however, mandate that all contracts for the improvement of structures within New Jersey contain language regarding alternative dispute resolution for payment disputes. Exactly what type of ADR, if any, the statute requires is not entirely clear.
As originally drafted, the statute required that payment disputes be submitted to binding arbitration under the American Arbitration Association's expedited arbitration rules. In its final form, the language requiring binding arbitration was replaced by language providing that construction contracts “shall” provide that payment disputes “may” be submitted to “alternative dispute resolution.”
The deletion of the arbitration requirement may have inadvertently created differences between litigation and arbitration of construction contract disputes, making litigation more attractive. Civil actions to collect payments under the statute must be brought in New Jersey and the prevailing party is entitled to an award of attorney fees. Language making these provisions applicable to arbitration were deleted from the version signed into law. Presumably, arbitrations need not be conducted in New Jersey, but there may be no right to collect attorney fees unless the contract or arbitration clause provides otherwise.
The language mandating that civil actions be conducted inside New Jersey applies to civil actions brought to collect payments under the prompt payment statute. However, New Jersey's Entire Controversy Doctrine, which requires that all aspects of a dispute between parties to litigation be included in a single action, effectively will mean that all construction litigation involving New Jersey projects be conducted within New Jersey.
The statute applies to all contracts entered into as of September 1, 2006.
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For more information about the issues covered in this report, please contact Robert J. MacPherson in our New York office at 212-895-2113 or at rmacpherson@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2006 Thelen Reid Brown Raysman & Steiner LLP
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