Most contractors at some point face the difficult question of whether or not to stop work on a construction project in the face of an owner or general contractor’s failure to pay for work completed. As detailed below, under the right circumstances, the New Jersey Prompt Payment Act offers some protection for contractors in this regard.
The Prompt Payment Act grants a prime contractor, subcontractor or subsubcontractor the right to stop or suspend work on a project “without penalty for breach of contract, until the payment required pursuant to this section is made” in certain circumstances. N.J.S.A. 2A:30A-2(d). This right arises only after the party wishing to suspend work provides “seven calendar days' written notice” to the owner, prime contractor or subcontractor that has failed to make payment in compliance with the Prompt Payment Act. In addition, the right to suspend work only arises when the owner, prime contractor or subcontractor that has a) failed to make a required payment, b) has not provided “a written statement of the amount withheld and the reason for the withholding” and c) is not engaged in a good faith effort to resolve the reason for the withholding. It is critical to realize that before you can determine if you have a right to stop working and walk off the job, you must determine if, given your unique situation, payment is actually overdue to you under the provisions of the Prompt Payment Act and your contract. This is a good reason to consult an attorney before suspending work.
If a prime contractor submits an invoice and does not receive any written objections from a private owner in response in 20 days, the contractor is entitled to payment of the invoice within 30 days. N.J.S.A. 2A:30A-2(a). The Prompt Payment Act specifically requires an owner who has approved a billing from a prime contractor to pay the amount due within 30 calendar days of the billing date if the prime contractor has performed in accordance with his contract. If periodic billing dates are specified in the contract, the 30 days run from the periodic date identified in the contract. If a private owner fails to provide the prime contractor with a written statement of the amount withheld and the reason for withholding payment, the billing shall be deemed approved and certified 20 days after it is received by the owner.
The language of the Prompt Payment Act is not as favorable for subcontractors and subsubcontractors. Nonetheless, the Prompt Payment Act may also be helpful to a subcontractor or subsubcontractor depending on the terms of its contract. Unless otherwise agreed in writing, within 10 calendar days of receiving payment from an owner, a prime contractor or subcontractor must pay a subcontractor or subsubcontractor for work performed in accordance with a contract if the work has been accepted by the owner or prime contractor. N.J.S.A. 2A:30A-2(b). However, if work is ongoing on a project and partial payments are being made, “the amount of money owed for work already completed shall only be payable if the subcontractor or subsubcontractor is performing to the satisfaction of the prime contractor or subcontractor, as applicable.” N.J.S.A. 2A:30A-2(b). This vague, subjective standard is not helpful to the subcontractor that has performed his contractual obligations.
If a payment is not made according to the terms of the Prompt Payment Act, the owner, prime contractor or subcontractor who has failed to pay is responsible for paying the amount due plus interest at a rate equal to the prime rate plus 1%. N.J.S.A. 2A:30A-2(c). If suit is filed in order to obtain payment pursuant to the Prompt Payment Act, the Prompt Payment Act requires courts to award the prevailing party reasonable costs and attorney’s fees. N.J.S.A. 2A:30A-2(f). This means that if a prime contractor, subcontractor or subsubcontractor is forced to sue in order to obtain payment pursuant to the Prompt Payment Act and wins, they are entitled to have the non-paying owner, prime contractor or subcontractor pay their reasonable attorney’s fees and costs.
There is very little case law interpreting the provisions of the Prompt Payment Act, some of which are vague. For example, the Prompt Payment Act only protects contractors who “improve” real property, which suggests its inapplicability to maintenance contracts. N.J.S.A. 2A:30A-1. While it can prove onerous to owners, the Prompt Payment Act is nonetheless a viable tool, particularly for prime contractors. The Act’s inclusion of a fee shifting provision gives prime contractors an incentive to invest in suit against an owner who has refused to comply with the Act despite performance by the prime contractor.
Our firm devotes a significant amount of its practice to New Jersey construction law and litigation. As part of this practice, we pursue and defend Prompt Payment Act claims. We welcome you to contact us for further information if you have a payment dispute on a construction project.
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