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NEW JERSEY LAWYER

Volume 16, Number 24 The Lawyer’s Source June 11, 2007 $5

The pro’s and cons of

Prompt Payment Act
The Prompt Payment Act (N.J.S.A. 2A:30A-1, et. seq.) A positive provision of the law is that a bill is deemed
governs virtually all public and private construction con- approved 20 days after the owner receives it, “unless the
tracts entered in New Jersey after last Sept. 1. Philosophically, owner provides, before the 20 days expires, a written
the legislative attempt to enact a uniform payment statute statement of the amount withheld and the reason for
that eliminates many financial inequities within the con- non-payment.” While this leaves the door open for non-
struction industry should be applauded. However, the payment, it mandates the prime contractor be furnished
statute lends itself to inequitable judicial interpretations, the reason for lack of payment. The statute recognizes
that where the owner is a public entity, an
approval meeting may have to occur prior to

THE LAW payment; but the law then states “provided

this exception has been defined in the bid

&MORE
specifications and contract documents.”
This places a burden on the owner to set
forth the reasons for non-payment and sets
a time frame in which to act. By the very fact
the bases for nonpayment are being put on
Michael S. Simon the table, it is hoped payment issues will be
discussed and resolved prior to commencing
especially to subcontracting entities. This skepticism isn’t an adversarial proceeding.
intended to detract from the law, but the construction com- Subcontractor and sub-subcontractor: This provision
munity and their counsel must recognize the perils. is similar to the one that applies to prime contractors and
The statute includes all construction contracts from owners. If the subcontractor or sub-subcontractor “has
demolition to erection, from laborers to design profession- performed in accordance with the provisions of its con-
als. By definition, the law is applicable to owners, prime con- tract … and the work has been accepted” by the applica-
tractors, subcontractors and sub-subcontractors, but ap- ble party, the prime contractor will pay the subcontractor,
parently does not apply to lower-tiered sub-subcontractors. and the subcontractor will pay the sub-subcontractor the
Prime contractor and owner: The statute places on the full amount received “within 10 calendar days of the
owner the statutory obligation to pay the amount due the receipt of each” payment. While there is no provision enti-
prime contractor, whether a progress payment, final pay- tling the prime contractor to withhold further retainage,
ment or retainage, within 30 calendar days after the billing the statute essentially puts a condition on the payment
date. The billing date for payments should be established in obligations with the words “and the parties have not oth-
the contract. However, to be entitled to payment, the prime erwise agreed in writing.” The importance of the contract
contractor must have performed “in accordance with the provisions has been heightened.
provisions of a contract with the owner.” This opens the Arguably, this law legislatively inserts a “pay if paid” or a
door for an owner to state the work has not been performed “pay when paid” condition into the prime contractor’s pay-
properly. Further, the billing must have been approved and ment obligations to the subcontractor, and the subcontrac-
certified by the owner or its authorized agent such as the tor to its sub-subcontractors. This concept is supported by
design professional, construction manager and even a the provision requiring payment “within 10 calendar days
financial institution. of the receipt.” This statute undermines the reasoning of
Michael S. Simon, a shareholder at Flaster/Greenberg in Trenton, concentrates on construction law, litigation and all phases
of alternative dispute resolution. He is a fellow in both the American College of Construction Lawyers and the American
Institute of Constructors.

Reprinted with the permission of New Jersey Lawyer © June 11, 2007
New York courts that have held a “pay when/if paid” provision is right to suspend performance, without penalty for breach, until
against public policy, since it would negate rights under New payment is made. However, the law adds two further conditions
York’s lien law. Is the New Jersey legislature saying that rights to the lack of payment. One, the violator has “not provided a writ-
under statutory bonds do not come into existence, as no monies ten statement of the amount withheld and the reason,” and two, if
may be due the subcontractor or sub-subcontractor until after the violator “is not engaged in a good-faith effort to resolve the
the prime contractor’s receipt of funds from the owner? reason for the withholding.” This might alter case law that upheld
Further confusion exists in the law’s following provision: the right to stop work for nonpayment alone. I raise this question
“In the case of ongoing work on the same project for which despite the law’s provision stating, “The rights, remedies or pro-
partial payments are made, the amount of money owed for tections provided by this section … shall be in addition to other
work already completed shall only be payable if the subcon- remedies provided pursuant to any other provision of state law.”
tractor or sub-subcontractor is performing to the satisfaction There is no definition of what “state law” means.
of the prime contractor or subcontractor, as applicable.” The statute also provides that contracts subject to it shall
If payment is not made, the violator will pay interest at provide that payment disputes “may be submitted to a process
prime plus 1 percent. If a “civil action” is required to collect of alternative dispute resolution.” This appears to provide for a
payments, “the prevailing party shall be awarded reasonable mandatory unilateral right. However, will this create multiple
costs and attorney fees.” dispute resolution procedures? Further, is or must the alterna-
This leads to a question: Does the reference to civil action tive dispute resolution be binding?
mean fees cannot be awarded in an alternative dispute resolu- While the law creates new equitable rights and obligations,
tion procedure? the wording also supports potential negative judicial interpre-
Remedy: If a party has not received payment as required, then tations. Counsel must review their clients’ prime and subcon-
after providing seven days’ written notice to the violator, it has the tracts to determine how they integrate with this statute.

Reprinted with the permission of New Jersey Lawyer © June 11, 2007