In the last edition of “Getting Paid” we discussed contract terms  where unless changes could be negotiated, the best response could be to walk away from the project. You may be faced with contract terms that are not quite as onerous but which, if not carefully analyzed and factored into your performance and pricing, can be equally devastating.

             In many instances, this second level of terms may be found in contracts that are prepared by your customer and which have been used on projects in other states. The telltale sign of such contracts is when terms are included that have been found unenforceable or void and against public policy in New Jersey. As such, their presence within the contract may not in and of itself be detrimental to you. However, the fact that you have a customer who is unfamiliar with New Jersey Construction Contract Law, may be primarily based outside of the State may therefore represent a payment risk to you.

             Other terms filling this category of risky but not necessarily “deal breakers” are provisions that raise suspicions of the integrity of your potential customer, not unlike sitting at a table where your opponent is wearing dark glasses to prevent you from watching his or her eyes and limiting you to what they are saying.

             When faced with these terms, your first option is to try to negotiate them out of the contract. If that cannot be accomplished and you still wish to proceed, your pricing will need to reflect the increased risk of having these terms in the contract.  You may also wish to include other terms to lessen the impact of these provisions.  Such suspect terms include:  

1.                  “Pay when paid” clauses that include no end date. Unlike the “pay if paid” clauses identified in the last volume of “Getting Paid” a “pay when paid” clause does not include the absolute conditional language placing the subcontractor in a position where they are subject to nonpayment, regardless of reason, from the customer’s customer. Rather, these clauses innocuously provide that the customer will pay you within a stated period of when they are paid. New Jersey case law has established that such a clause is ruled by a “reasonableness standard” and therefore the fact that your customer may not be paid six weeks, six months or six years down the line does not constitute an automatic defense to your claim for payment. These clauses become particularly problematic when they are being applied to “retainage” that may be held by the owner from your customer. That retainage may have absolutely no bearing on the nature or scope of your work. In some instances, that retainage may be at a different percentage than your retainage. Your customer may attempt, if you have been unable to negotiate a specific limitation of time, to claim that this pay when paid clause has an infinite duration. Your remedies may include negotiating in some “outside limits”,  factoring interest into your proposal, submitting notices after a “reasonable period of time” that time is up or simply increasing your pricing to factor in the potential of late payment.  

2.                  Waivers of construction liens.  In many states, the lien law allows parties to contractually waive lien rights. In New Jersey, on private projects subject to the New Jersey Construction Lien Law, waivers of lien rights, except to the extent that payment has been made, are considered void and in violation of public policy. Notably on public projects in New Jersey, no such prohibition exists with regard to Mechanics Lien largely due to the ability of an otherwise potential lien claimant to also be a beneficiary of a payment bond. Contractors, owners and others who often deal with projects outside of the State of New Jersey may use contract forms that prohibit the filing of liens. When you see such a clause, if it is on a private project, while you may conclude that it is unenforceable and therefore can stay within the contract, your radar should alert you to the fact that you are dealing with a customer who is not familiar with New Jersey construction operations and who may decide to put you through the task of fighting the lien issue. Again, absent negotiating this out of the contract, inclusion of interest provisions or increasing your pricing to cover the contingency of non-payment would be of value.   

3.                  Liquidated damage clauses and no damage for delay clauses. In New Jersey on private projects each of these are legal and if properly drafted, enforceable. On public projects, “no damage for delay” clauses have been legislatively determined to be void and against public policy except in limited circumstances. When you are presented with a contract that includes either or both of these clauses, you need to be alert to the possibility that your customer may attempt to invoke liquidated damages against you (or pass through owner liquidated damages) and/or following delays to your progress, may defend your claims with a recitation to a no damage for delay clause. The combined existence of both of these clauses places you in situation where you could be held liable for delays on the project while simultaneously having no rights in the event that you are delayed. You need to concern yourself with whether or not this customer can be trusted to treat these clauses reasonably,  whether your customer’s customer can be trusted to treat these clauses reasonably, and/or whether the existence of the risk posed by these clauses needs to be factored into your pricing.  You will also need to pay careful attention to the administrative clauses dealing with notices of delay, time extensions, interference and the like to assure that you make proper use of these notice provisions. You may also try to do some research to determine how both your customer and its customer handle these situations.  If you learn that they or either of them are prone to taking advantage of these unbalanced terms, you may need to decide whether this combination of clauses creates a “walk away” situation. 

4.                  Full indemnity clauses. Many contracts developed contemplating other than new Jersey law, will include a 100% full indemnification provision requiring you to indemnify your customer for any and all claims arising out of the project including where those claims arise from the customer’s own negligence. Under New Jersey law, there are statutory limits to indemnification provisions where there is an attempt to compel indemnification of claims resulting from the indemnification recipient’s own negligence. You need to be mindful of the nature and extent of an indemnification clause at two levels. First from your own risk assessment, your work may have a very limited scope and extent and you do not wish to be placed into a situation where you are indemnifying (paying for potential claims as well as the cost of defending such claims) your customer for problems that were not of within your responsibility. The second level of concern must deal with insurance. It is very likely that you will be required under your contract with your customer to provide certain insurance coverages. Acceptance of excessive indemnification responsibilities may make the obtaining of insurance for this project difficult, expensive or impossible. Where an indemnification clause exceeds what is allowed under New Jersey law an excellent response to your customer is that your insurance carrier will not provide coverage in the face of such an overbroad indemnification clause. If your customer is not willing to accept that position, you may be in a situation where you need to decide whether to walk away from the project or to modify your pricing to the extent that you have now covered this additional potential risk.

 5.                  Multiple prime contractors. In New Jersey public school and county/municipal projects may be performed under what is known as a multiple prime contractor construction delivery system. Under this arrangement, five separate trades (general construction, electrical, plumbing, HVAC and structural steel) will each have direct contracts with the owner.  The contract documents as between those parties and the owner may include general language regarding coordination and cooperation among the contractors. It may also include some designation as to which contractor (usually the contractor for general construction) has overall coordination responsibilities. The fact of the matter is, however, that since the contractor for general construction has little or no purse string power over the electrical contractor and vice versa, situations arise where these parties are not fully cooperating and to the contrary may be interfering with and disrupting the others’ work. If you are one of these prime contractors and/or you are a subcontractor to one of these prime contractors you may be adversely affected by this lack of cooperation. Even if you see a situation where the owner has also engaged a construction manager, unless the construction manager is provided by contract with full and extensive coordination responsibilities, you will remain subject to the potential lack of cooperation between the individual primes. This can cause significant increases in the cost of your work, can delay your work, can create situations where you are being ordered to accelerate work to catch up to a schedule which you had no input and so on. Since most of these multi-prime projects occur in the public sector, you will not know at the time you are submitting your bid who all of the prime contractors are. You will however have the ability to have access to know who the contracts were awarded to (these can be obtained through a request under the New Jersey Open Public Records Act).  You will also have the ability to obtain access to the prime contract terms and conditions prior to submitting your quote as well as have access to the terms of the owner’s contracts with the design professionals and the construction manager.  You should take advantage of you access to public records to obtain this information.   Prior to issuing your quotation to your customer (if you are at the subcontractor or supplier level) you should insist that your customer provide you with the administrative terms and conditions dealing with project coordination so that you know whether there is any built-in coordination responsibilities and who may have them. In these instances, who the other players are who sitting at the table may have a significant impact on the amount you are willing to ante and what your betting limits are going to be. If the project is a multiple prime project and you are at a subcontractor or supplier level, you also need to investigate your customers’ experience in dealing with multi-prime projects. Multi-prime public projects are not the venue where you want to be controlled by a customer who never has had the experience with such a project delivery system.

            All of the above clauses may be countered by simply increasing your price to cover the risk associated with dealing under these clauses. In many instances, even if you cannot negotiate the clause out of the contract, the clause itself may be unenforceable. However, if you are dealing with a customer who apparently doesn’t even know what they don’t know, that itself is a risk that needs to be factored into your anticipated performance and your pricing. Going into a project that includes these contract clauses you must further assure that your project management personnel be extremely diligent in complying all administrative responsibilities under the contract to assure that proper documentation exists to prevent your customer from unjustifiably invoking these clauses to your detriment.

CURETON CLARK, P.C.

James H. Landgraf, Esq.