News from Tesser & Cohen

   The Prompt Payment Act, N.J.S.A. 2A:30A-2, ("the Act") can be a powerful tool for prime contractors and lower tier contractors in their efforts to collect payment from an owner or senior contractor. The Act provides an aggrieved contractor with significant rights, which can be powerful tools in obtaining payment from a delinquent owner. However, there are many caveats to the Act, which is often misunderstood. This article explains what protection the Act provides, and what the caveats are.
   Prior to the 2006 amendments, the Act provided more limited protections than it does today. Under the old law, a subcontractor or sub-subcontractor was entitled to interest at the prime rate plus 1% should the senior contractor fail to make payment in a timely manner. In order for an aggrieved subcontractor to collect interest under the Act, its work had to be accepted by the general contractor or owner. Despite the pre-amendment Act's severe limitations, it managed to somewhat ameliorate the impact of unjustifiable non-payment by senior contractors.
   The amended Act, which has greatly expanded the protections afforded unpaid contractors, is applicable to most contracts entered into after September 1, 2006. The new provisions of the Act significantly alter the relationship between the general contractor and the owner by not only including the general contractor as a protected party under the Act, but also by providing that the general contractor's billing may be deemed accepted if not objected to, in writing, by the owner or its agents. The new provisions of the Act also lessen the burden of maintaining an action to collect unpaid monies as the prevailing party is now entitled to its attorneys' fees.
   It is important for today's owners and contractors to understand both the powers and limitations of the Act. Uncontested billing from a prime contractor is deemed accepted if the owner, or its representative, does not object in writing within 20 days of receipt of the invoice. The owner violates the Act, and is subject to penalties, including interest at the prime rate plus 1% and attorneys' fees, if it does not pay accepted billing within 30 days of receipt of the invoice.
   Moreover, a prime contractor, subcontractor, or sub-subcontractor may suspend performance for non-payment upon seven days written notice if the owner or senior contractor:
1)     has not paid for accepted work in violation of the Act; and
2)     has not provided a written statement of the amount withheld and the reason for such withholding; and
3)     has not made a good faith effort to resolve the payment dispute.[Fn1]
Once payment is made, the contractor must resume work under the contract.
   There are limitations to the Act's scope and severity. First, an aggrieved contractor can only successfully pursue a claim for work "performed in accordance with the terms of a contract[.]" N.J.S.A 2A:30A-2. If the work is done incorrectly, the Act no longer applies. Further, when dealing with public owners, the 'deemed accepted' provision is restrained if the public owner is required to vote on authorizations for periodic payments, final payment or retainage monies. In such a case, the amount due may be approved and certified at the next scheduled public meeting of the entity's governing body, and then paid during the entity's subsequent payment cycle, provided this exception was defined in the bid specifications and contract documents.
   The terms by which subcontractors and sub-subcontractors obtain relief are limited further. There is no 'deemed accepted' provision for subs. Instead, acceptance of the work occurs when the general contractor, owner or owner's representative actually accepts and/or certifies the work. Payment is late, and thus in violation of the Act, if not made within 10 days of acceptance of the work and the contractor's receipt of the money from the owner. Therefore, subs are protected from unscrupulous contractors who refuse to pay for work the owner has accepted, but have no statutory protection from an owner who refuses to accept the work in order to avoid payment.
   The prevailing party in claims arising from this Act is entitled to reimbursement of its reasonable attorneys' fees. Nowhere in the language of the Act, however, is the entitlement to attorneys' fees limited to the unpaid contractor. Therefore, while a meritorious claim under the Act may be subsidized by the non-paying party, a failed claim may leave the contractor with a bill for the owner's attorneys' fees.
   The Prompt Payment Act is a strong tool for dealing with unjustified non-payment, but will not automatically provide an unpaid contractor relief. Instead, the Act mainly supplements the contractor's existing rights by providing interest and attorneys' fees for those cases in which there was no legal justification for non-payment. However, as a precautionary measure, an owner (or owner's representative) should immediately dispute in writing any billing it feels is unwarranted.