Monthly Archives: February 2023

New Jersey Appellate Court Addresses Whether Pay-if-Paid Clauses Are Enforceable

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Matthew L. Erlanger | Construction Law Now Blog

In the construction industry, a “pay-if-paid” provision is common in subcontracts, which conditions a general contractor’s obligation to make payment to a subcontractor on the general contractor’s actual receipt of payment from the owner. In other words, unless a general contractor actually receives payment from the owner, neither the general contractor nor its surety have any legal obligation to pay the subcontractor. Whether a pay-if-paid provision is enforceable varies from state to state.

Some states, including Delaware and Virginia, have statutes in place making pay-if-paid provisions unenforceable in most circumstances. In other states, including Pennsylvania, the courts have generally held pay-if-paid provisions enforceable as written.

New Jersey courts had never addressed whether a pay-if-paid provision is enforceable until the New Jersey Superior Court, Appellate Division recently decided in JPC Merger Sub LLC v. Tricon Enterprises, Inc.

In JPC, Tricon, as the general contractor, sent a purchase order to JPC for the supply of fabricated concrete box beams for work on a public improvement project for Union County. As written, the purchase order contained pay-if-paid language stating that “Vendor [JPC] understands and agrees that Tricon’s obligation to make any payment to Vendor is subject to, and shall not exist unless and until Tricon’s receipt of payment on account of Vendor’s work from the Owner” and that “the occurrence and satisfaction of which shall be a condition precedent to Tricon’s duty to remit payment.” In addition, the pay-if-paid provision stated that Tricon would pay within 14 days of receiving payment from the county.

JPC made revisions to the purchase order, including reducing the time for Tricon to pay after receiving payment from the county from 14 days to seven days. In addition, elsewhere in the purchase order, JPC wrote, “ALL PAYMENTS WITHIN 45 DAYS OF [JPC’S] INVOICES.” However, JPC did not delete the pay-if-paid language. Following JPC’s changes, both parties signed.

JPC then began fabricating the box beams and submitting invoices—10 in total. While Tricon paid the first two invoices, Tricon refused further delivery of the remaining box beams and refused to pay the remaining invoices because the county did not relocate certain high voltage power lines necessary for the work on the project to move forward, and did not pay Tricon for the remaining box beams. The county took a contrary position that Tricon was responsible for making arrangements with the utility company to relocate the power lines.

As a result of Tricon’s failure to pay, JPC submitted a claim to Tricon’s payment bond surety, QBE Insurance. Because Tricon and QBE took the position that payment was not due as a result of the pay-if-paid language, QBE also refused payment. JPC then filed a lawsuit against Tricon and QBE. Tricon and QBE moved for summary judgment based on the pay-if-paid provision, and the trial court found the pay-if-paid provision applicable and enforceable and granted the motion, dismissing JPC’s lawsuit. JPC then appealed.

On appeal, the Appellate Division addressed the enforceability of pay-if-paid provisions. The court concluded that New Jersey recognizes the freedom of parties to contract as they wish. As a result, the court held that as long as the contract contains “clear and unambiguous” language showing an intent to make the general contractor’s obligation to make payment conditional on receiving payment from the owner, pay-if-paid provisions are enforceable. However, the court cautioned that a pay-if-paid defense could be defeated if the owner’s reasons for not paying were the result of the general contractor’s conduct or actions.

Viewing the language of the purchase order, the Appellate Division determined that the parties agreed to be bound by the pay-if-paid provision. While JPC argued that the obligation to make payment within 45 days after the invoice modified the pay-if-paid provision, the court found that this merely created a timetable for Tricon’s payment schedule, while the pay-if-paid language constituted an “absolute precondition” to any obligation to make payment.

Despite acknowledging the enforceability of the pay-if-paid provision, the Appellate Division reversed the trial court’s dismissal of JPC’s claims. Instead, the court found that there was a factual dispute as to whether Tricon’s actions or conduct caused the county not to pay, and, if so, this could make Tricon responsible for payment regardless of whether the county paid. As a result, the Appellate Division determined that a trial was necessary.

Based on the Appellate Division’s holding in JPC, there is now greater clarity in New Jersey that pay-if-paid provisions will be enforced as long as they are clear and unambiguous and as long as the general contractor is not responsible for the owner’s failure to make payment. As a result, it is expected that general contractors will rely upon pay-if-paid provisions to a greater extent than they do currently. But, for subcontractors, it will now be increasingly important to review the payment provisions in your subcontracts to determine whether there exists an obligation to make the payment if no payment has been received because we now know that courts will enforce such provisions.

Negotiating contractual language can be difficult for even the most sophisticated contractors. Should you have any questions about this decision and revisions that should be made to your subcontracts, feel free to contact the lawyers at Cohen Seglias who can guide you through this process.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Remote Inspections (Use of Drones, etc.)

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Jonathan Deasy | Spilman Thomas & Battle

A picture is worth a thousand words, but what about a drone video? To construction firms and the lawyers who represent them, drones, also known as unmanned aerial vehicles (“UAVs”), enable firms to capture large amounts of high-quality information in a quick and efficient manner. Whether a construction project is in the pre-planning phase or involves a dispute giving rise to litigation, construction lawyers should be familiar with regulations regarding the use of UAVs and how data generated by them can be used by counsel to prove or disprove construction claims.

In 2012, Congress passed the FAA Modernization and Reform Act, which required the Federal Aviation Administration (“FAA”) to establish a regulatory scheme to manage “civil small UAVs within the United States.” Accordingly, the FAA implemented Federal Regulation Part 107 providing that commercial drones must: (1) not weigh more than 55 lbs.; (2) be operated within the United States; (3) fly only in uncontrolled airspace; (4) fly under 400 feet; (5) fly during the day; (6) fly below 100 mph; (7) not fly over people; (8) not be operated from a moving vehicle; and (9) remain in the line of sight of the operator during operation. In Pennsylvania, a firm must also ensure it is not operating a UAV in a manner which would place another person in reasonable fear of bodily injury.

During construction, gathering visual data through UAVs reduces the amount of time necessary to gain an understanding of various on-site conditions. Additionally, UAVs remove the human error element that traditionally accompanies an on-site inspection, which can later lead to expensive inaccuracies. While these benefits may seem obvious, it’s also worth noting that researchers are developing newfound uses for UAVs on a regular basis. For instance, during reconstruction of the Fern Hollow Bridge, researchers from the University of Pittsburgh are using UAVs equipped with photo and lidar imaging systems to capture data during construction. This data is then used to create 3-D digital models, which ultimately allows researchers and other firms to gain a deeper understanding of public infrastructure projects and develop best practices.

At the litigation stage, UAV footage and imaging preserves evidence and offers a detailed visual record that may be referred to as necessary. Often, construction projects are massive operations spanning over numerous acres, or even miles. Litigators can, and should, use UAV footage when available in an effort to efficiently highlight and distill the issues on any given project. Ultimately however, the visual data that depicts the continued progress and condition of a construction site reduces the risk of litigation and allows those involved in a project to better defend against any disputes initiated against them.

Therefore, so long as federal and state regulations are followed, commercial UAVs provide a safer and more efficient way of doing business. Whether attempting to maintain client expectations on a construction project or proving the cause of a defect at trial, UAVs can have an immediate impact on the ways in which firms transact business or resolve disputes.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Show Me the Money: The Good Faith Dispute Exception to Prompt Payment Penalties

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Garret Murai | California Construction Law Blog

California has a number of prompt payment penalty statutes on the books. Among them is Civil Code section 8800 which requires project owners on private works projects to pay progress payments to direct contractors within 30 days after demand for payment pursuant to contract or be subject to prompt payment penalties of two percent (2%) per month on the amount wrongfully withheld. Like California’s other prompt payment penalty statutes, however, there is an important  carve out: If there is a good faith dispute between the project owner and the direct contractor the project owner may withhold up to 150% of the dispute amount. And, that, is a higher-tiered party’s “get out of jail free” card.

In Vought Construction Inc. v. Stock (2022) 84 Cal.App.5th 622, the 1st District Court of Appeals examined whether a project owner’s claim for liquidated damages constitutes a good faith dispute under Civil Code section 8800.

The Vought Construction Case

In September 2019, Vought Construction, Inc. entered into a construction contract with Jay Stock for a home renovation project.  The contract required Vought to complete its work by January 13, 2020 and included a liquidated damage provision providing that Vought would be liable in the amount of $300 per day for each day Vought did not complete construction within the time agreed upon. During the project several change orders were approved which extended the completion date to February 11, 2020.

Toward the end of the project an issue arose regarding the installation of railing outside the house. The outside railing was supposed to match railing inside the house and both Vought and Stock, according to their testimony, were under the impression that the railing could be ordered and installed without a set of architectural drawings. Turns out that was no the case. Three weeks before the date set for project completion, Vought informed Stock that architectural drawings would be needed to fabricate the railing. Further, due to the onset of the COVID-19 pandemic, Vought was unable to install the railings until August 2020. Work on the remaining portions of the house, however, were completed in May 2020.

In April 2020, Vought sent an invoice to Stock for $73,000, and when this was not paid, sent another invoice to Stock in May 2020, which was also unpaid. In June 2020, Vought sent a proposed change order to Stock for $50,000 for the railings. Stock rejected the change order and continued to refuse to make payment on the early invoices. In July 2020, Vought recorded a mechanics lien for $78,000 and in August 2020 sent a proposed change order to Stock for $10,000 in “legal costs” and interests on unpaid progress payments. In response, Stock claimed that he was entitled to liquidated damages of $53,000, and in December 2020 paid Vought $20,000, or roughly the difference between Vought’s invoice for $73,000 and Stock’s liquidated damage claim of $53,000. The parties decided to litigate.

In November 2021, after a four day bench trial, the trial court found that Vought was entitled to $59,000 in unpaid invoices (the difference between the total contract price and amounts paid by Stock including the $20,000 paid by Stock in December 2020) plus $31,000 in additional compensation for the outside railing, and that Stock was entitled to an offset of $29,000 for liquidated damages, for a total award in favor of Vought of $61,000 plus prejudgment interest in the amount of $17,000.

The trial court further ruled that neither party was the prevailing party and that Vought was not entitled to prompt payment penalties of 2% per month under Civil Code section 8000 because “there was . . . a good faith dispute between the parties as to what needed to be paid.”

Vought appealed.

The Appeal

On appeal, Vought argued that Stock violated Civil Code section 8000 as a matter of law, that it (Vought) was the prevailing party as a matter of law and, therefore, entitled to recover its attorneys’ fees under Section 8000, that Stock’s liquidated damage claim was barred due to his bad-faith, and that the trial court erred in failing to order foreclosure of its mechanics lien.

As to Vought’s Civil Code section 8000 contention, the Court of Appeal held that the progress payments withheld by Stock on account of liquidated damages was a “good faith dispute” under Section 8000, which permits a project owner to withhold payment “[i]f there is a good faith dispute between the owner and direct contractor as to a progress payment due,” because the parties contract specifically allowed Stock to “withhold [payment] in whole or in part to such extent as may be necessary . . . to protect the Owner from loss . . . because of . . . reasonable evidence that the Work will not be completed within the Contract Time, and that the unpaid balance would not be adequate to cover actual or liquidated damages for the anticipated delay . . .” The Court also distinguished the case from United Riggers & Erectors, Inc. v. Coast Iron & Steel Co. (2018) 4 Cal.5th 1082, a case we wrote about earlier, on the ground that United Riggers involved a dispute over change orders that would have increased amounts then due not liquidated damages that would have decreased amounts then due.

As to Vought’s prevailing party contention, the Court of Appeal held that the trial court was within its discretion to find that neither party was the prevailing party under Civil Code section 8000 which provides that the prevailing party is entitled to the recovery of reasonable attorneys’ fees. However, the Court of Appeals held that because Vought obtained a net monetary recovery against Stock, that under Code of Civil Procedure section 1032, Vought was the prevailing party and entitled to recovery of its costs.

As to Vought’s liquidated damage claim, while acknowledging that existing case law allowed a contractor to challenge liquidated damages in cases where delay “was caused by matters beyond [a contractor]’s control and was entirely excusable,” the Court of Appeal held that the trial court “correctly held that Vought was not relieved of the obligation to pay liquidated damages for the delay that it caused even though it was not responsible for the entire delay.”

Finally, the Court of Appeal found that Vought had satisfied the elements of its foreclosure of mechanics lien and remanded the case back to the trial court for an order allowing Vought to foreclose on its mechanics lien.

Conclusion

This is a very interesting case both generally and because I’m currently litigating a case involving prompt payment penalties. While the case involved a specific prompt payment penalty statute, Civil Code section 8000, the case, I believe, has applicability to all of the prompt payment penalty statutes. The case is interesting in that the Court of Appeals based its decision on both the prompt payment penalty statute as well as the underlying contract between the parties but makes no distinction as to whether either alone was sufficient to support its decision. While liquidated damages are a product of contract, would the Court of Appeal reached the same conclusion if the parties’ contract did not expressly provide that payment may be withheld to cover liquidated damages and, instead, merely stated, as most liquidated damage provisions do, that liquidated damages are owed if a project is not timely completed but with no reference to a hold back?

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Construction Litigation Roundup: “It’s None of Your Business.”

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Daniel Lund III | Phelps Dunbar

“It’s none of your business.”

So said a construction surety resisting discovery of its underwriting file in the context of the surety’s affirmative $2 million indemnity claim (on a $25M bond), and a Missouri federal court agreed. 

In response to the surety’s indemnity suit, the defaulted principal contractor and additional corporate indemnitors offered up defenses of “lack of consideration and the doctrine of unclean hands, laches, waiver and/or estoppel, among others.” The indemnitors also issued written discovery to the surety seeking to obtain the surety’s underwriting file – which would reveal the underpinnings of the surety’s decision to issue the bond to the contractor – asserting “that the underwriting and due diligence documents are relevant to the[] lack of consideration defense. [Indemnitors] claim that ‘[t]his defense is based on Defendants’ belief that Plaintiff did not conduct any reasonable inquiry into any Defendants’ ability to pay or financial resources and therefore Plaintiff did not rely on the financial condition of each Defendant in determining whether to issue the bonds.’” 

The federal district court sided with the surety and denied the motion to compel:

“Here, the Indemnity Agreement states that the issuance of the bonds is the consideration for the Indemnity Agreement. Defendants have provided no basis for the Court to look outside this contract term to determine whether the Bonds do not constitute consideration. …

“Further, the Court holds that the requested discovery is not relevant to this litigation because the execution of the Bonds is sufficient consideration for the execution of the Indemnity Agreement under Missouri law. … The Indemnity Agreement specifically provides, ‘the Indemnitors have a substantial, material and beneficial interest in the obtaining of the Bonds …’ 

“Defendants cite to only one case to support their claim that a lack of reliance on one of multiple indemnitors for a bond can be an effective defense to an action on an indemnity agreement. …[T]hat case involved the liability of a wife indemnitor, who seemingly had no relationship to the transaction, [as compared to] this case which involves sophisticated business entities, who acknowledged the Bonds as consideration for the Indemnity Agreement. The Court holds that discovery related to the lack of consideration defense is not reasonably calculated to lead to admissible evidence.”

Fidelity & Deposit Co. v. Blanton, 2023 U.S. Dist. LEXIS 21210 (E.D. Mo. Feb. 8, 2023)

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Failure to Understand Contract Fire Provisions Could Burn Construction Contractors

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Nicholas W. Siewert | Plunkett Cooney

Let’s set the stage! A new hospital is being constructed with public funds in Gotham. Your Insured, BW Painting, is hired by the general contractor to paint all the rooms in the new hospital.

The general contractor accepted BW Painting’s bid and forwarded to them an American Institute of Architects (AIA) Subcontractor Agreement for signature. BW Painting signs the agreement and sends it back. Like many smaller companies in the building trades, BW Painting’s owner, Bruce, doesn’t read the agreement in totality. Instead, he only ensures the scope of work and payment terms are correct.

As BW Painting’s work is near the end of the project, most of the construction will be complete before its work begins. In preparation, over a few weeks before beginning work, Bruce and his employees begin moving materials and equipment into the hospital. However, as often happens with large projects, a series of delays and equipment failures result in Bruce and his crew starting work without heat.

Not a big deal, Bruce sets up a few portable heaters and starts working. A few days after starting, Bruce gets a call from the site superintendent, Gordan, who tells him that the building is on fire and his crew should not report to the site that day.

Several months go by and BW Painting is served with a lawsuit by the property owner and GC for negligence and breach of contract. The complaint alleges that not only did BW Painting negligently cause the fire, but it also breached the AIA subcontractor agreement. Surprisingly to Bruce, the AIA agreement had detailed fire precaution and protection requirements, which were not complied with.

Setting aside the coverage issues and the duty to defend versus indemnify, most insureds and adjusters have never heard of such contractual requirements. However, most AIA contracts contain provisions obligating subcontractors to take certain fire protection and fire precautions steps.

Most boilerplate language requires subcontractors to do one or more of the following;

All oil-soaked rags, papers, and other similar combustible material shall be removed from the building at the close of each workday, or more often if necessary, and placed in metal containers with self-closing lids.

All heating devices in connection with temporary heating facilities shall be at the least hazardous type, shall have proper safety provisions, and shall be installed at such locations and in such manner as to minimize the hazard.

The temporary heating devices shall be inspected regularly to ensure that they are always in safe and proper operating condition. The contractor shall provide continuously during operation properly trained personnel for said inspections.

The subcontractor shall provide the necessary personnel and firefighting equipment to effectively control fires resulting from any operation involving the use of flame sparks or sparking devices. During such operations, all highly combustible or flammable material shall be removed immediately from the working area. If such removal is impossible that area should be protected with fire blankets or other suitable non-combustible shields.

Not more than one day’s supply of flammable liquids, gases, or propane shall be brought into any building at one time. All flammable liquids having a flashpoint of 110 degrees or below must be brought into any building and shall be confined to a labeled safety can. Bulk supplies of any flammable liquid shall be stored at a sufficiently safe distance from any building and from yard storage of building supplies.

Only a reasonable working supply of flammable building materials shall be located inside of or on the roof of the building.

The subcontractor shall during the entire construction, and until work is completed provide and maintain all materials equipment, and services necessary for an adequate Fire Protection system which shall meet the approval of the general contractor or architect.

The subcontractor shall maintain during construction an appropriate number of fire extinguishers which shall be in good working order conveniently located clearly visible and readily accessible.

Armed with this knowledge we have a lot of questions for Bruce, such as:

  • How much paint was being stored in the building for staging?
  • What kind of heater was being used?
  • By whom and when were they last inspected?
  • Did you bring fire extinguishers to the site?
  • What was BW Painting Fire Protection System?
  • How did Bruce and his crew clean up at the end of a workday?

Seems trivial, but Bruce had contractual obligations he likely was completely unaware of. Contractual obligations which, if he breached, are unlikely covered by his general liability insurance. Again, seems trivial, but it is not unheard of for an insurer to seek reimbursement from the insured for the cost of having to defend portions of lawsuits not covered by the policy. These issues mean Bruce is potentially liable for tens of thousands of dollars in damages.

So, what is the takeaway for you, dear reader? Well, that’s simple.

Don’t sign a contract without reading it and consulting legal counsel! Also, please don’t use Cousin Vinny as your lawyer.

Nice enough guy, but does he know what the NFPA requirements are for fire prevention during hot work? Or the NFPA standards are for the type, location and size of fire extinguishers on construction sites? Or whether the container you are placing combustible-soaked material in, meets the minimum standards under the NFPA.

These and many other important details underscore the importance of understanding and complying with contractual fire protection provisions. Otherwise, your business and its insurance provider could get burned.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.