There will be instances when you have the upper hand in dictating some of the contract terms. There will also be occasions where you have legitimate, supportable and enforceable claims whether it be for extra compensation, for a time extension or for a back charge. In these instances, there is always an urge to stretch the advantage. This urge must be carefully controlled.

Contract Terms:  Owners, including public owners who have the ability to prepare the initial draft of the contract terms and in the public arena have the ability to dictate what the contract terms will be, often reach the unfortunate opinion that the more one-sided the contract terms may be, the better off they will be. This attitude is also often found in general contractors who include onerous, one-sided terms in their subcontracts and present them to subcontractors on a “take it or leave it” basis. The use of particularly one-sided contract documents can backfire on several levels.

One-sided contract terms can run afoul of statutory prohibitions and be rendered void and unenforceable including:

§         Indemnification clauses that require the lower tiered party to indemnify the controlling party for all actions including the controlling party’s own negligence in violation of N.J.S.A. 2A:40A-1.

§         A provision requiring that the subcontractor and/or supplier waive all lien rights under the New Jersey Construction Lien Law (private projects) N.J.S.A. 2A:44A-38.

§         The inclusion of a general “no damage for delay” clause in a public contract by the public owner in violation of N.J.S.A. 18A:18-41 (Board of Education); N.J.S.A. 40A:11-19 (Local Public Contracts).

§         A “pay if paid” clause or a “pay when paid” clause in a subcontract that provides no reasonable endpoint for when the subcontractor is entitled to receipt of funds earned.

 The above clauses which may be placed into a contract but subsequently found unenforceable. Other clauses that place huge insurance requirements on the lower tiered party, which place full responsibility for unforeseen or covered conditions upon the contractor or subcontractor  or which attempt to place all risk upon one party can also backfire. The party assuming the risk may not be financially capable of that level of risk resulting in a forced default against an “empty pocket.” In other instances, the party assuming the risk will not be providing the most advantageous pricing since they need to price for excess risk. Accordingly, if the price is escalated as a result of the contractor having to assume all potential responsibility for unforeseen conditions, where no adverse conditions are encountered, that contractor will have received a monetary windfall for the assumption of a risk that never came to bear. It may have be more economically advantageous for the owner or general contractor to allow a formula for addressing actual adverse conditions that may be encountered and for more evenly spacing the risk.

 Claims:  A second set of situations where a party may press a perceived advantage is in the processing of claims. Most contracts and subcontracts  have provisions addressing changed work that may allow for changes in compensation and/or time extensions. Ideally, these provisions are built into the contract to allow a fair resolution so that no party is disadvantaged.

 In an instance of overreaching, a contractor or subcontractor may have a perfectly valid basis to seek additional compensation and/or a time extension due to, by example, changed conditions on the site. Anticipating that any claim that is made will be subject to negotiation, that contractor or subcontractor then inflates the claim. Thereupon a “self fulfilling prophecy” occurs in that the owner or general contractor receiving the claim will now have no alternative but to reject and then perhaps start at a level well below what might be due and owing. Time, energy and effort is spent, good will is lost and the relationship takes on unnecessary adversarial aspects. Instead of reaching a quick resolution based upon a fair pricing, no monies are paid while the parties position and reposition themselves on what become more intractable yet often unsupportable claims. Where the claim is going to a public entity, the inflated claim may also violate the New Jersey False Claims Act (N.J.S.A. 2A:32c-1) resulting in not only rejection but also sanctions.

 This same mentality may strike where the owner or general contractor has a legitimate basis for a credit or back charge but instead of simply providing a reasoned and supportable monetary claim, all payments are stopped or other draconian steps are taken leading to the same adversarial impasse.  In the worst instances, unpaid contractors or subcontractors then walk off the project or are financially forced into default. Further, owners or prime contractors who commit acts that will give rise to a claim under the New Jersey Prompt Payment Act (N.J.S.A. 2A:30A-1) allowing a contractor or subcontractor to seek additional sanctions.

 In conclusion, legitimate efforts to spread construction project risk are appropriate but at a certain point where risk is onerously forced upon only one side, the bet may well exceed the value of the cards. Similarly, legitimate claims for time or compensation and legitimate back charges are well within reason under a normal construction contract or subcontract. While you may win a hand or two on a naked bluff, overreaching a perceived advantage on a claim seldom plays to anyone’s benefit.

                                                                 CURETON CLARK, P.C.

                                                                  James H. Landgraf, Esq.