KNOW YOUR PROJECT OWNER OR LOSE YOUR RIGHTS

“Never assume” can be a devastating mistake when dealing with government agencies. That old saying was put to the test where a subcontractor named MasTec mistakenly assumed that the “Mercer County Improvement Authority” must be part of Mercer County—thereby losing its lien security for over $6,900,000. Even worse, if MasTec had done a little more advance preparation, MasTec might have discovered that it did have lien rights elsewhere. If you want to find out the answer to what MasTec should have done, and what you can do to avoid similar missteps, read along. Case Name: MasTec Renewables Constr. Co. v. Sunlight Gen. Mercer Solar, LLC. (A-1833-15T4).
 
The Mercer County Improvement Authority (“Improvement Authority”) entered into a contract with Sunlight General Mercer Solar, LLC (“Sunlight”) to act as general contractor for the construction of a renewable solar generating facility. Sunlight then hired MasTec to design and build the facility. Sunlight also obtained a leasehold interest in that facility. If you are wondering, no payment/performance bond was required from Sunlight to protect MasTec because Sunlight was not a public agency.
 
MasTec was not fully paid, so it filed a municipal mechanics lien for $10,250,000. Later, MasTec partially settled its claims with Sunlight and reduced the lien to $6,900,000. As to the lien, however, the Improvement Authority challenged its validity in court. The Appellate Division then decided that the lien was not valid because the Improvement Authority’s project was not subject to municipal mechanics liens under the “County Public Improvement Authorities” Law.
 
While the Improvement Authority was obviously named the “Mercer County Improvement Authority”, the Court held that the Improvement Authority was actually an arm of the State government, not the Mercer County government. Since municipal mechanics cannot be filed against the State government, MasTec’s lien filing was unenforceable and had no value.
 
Taking over 34 pages to get there, the Court’s analysis basically hinged on two bits of pretty clear language in the “County Improvement Authorities Law” (“CIAL”): (1) an authority is “a public body politic and corporate constituting a political subdivision of the State”, and (2) “an authority shall not constitute or be deemed to be a county or municipality or agency or component of a municipality for the purposes of any other law[.]” That is, the Authority was a State subdivision; it was not a part of the county. So, MasTech never had municipal mechanics lien rights it could enforce.
 
Analysis: There are three primary laws available to subcontractors/suppliers which they may use to secure their payment rights: municipal mechanics liens, public works payment/performance bonds, and construction liens. As seen in this case, municipal mechanics lien filings are not enforceable on State projects, including county improvement authorities, even though they are generally available on county projects, municipal projects and school district projects. For bonds, both State and county projects, as well as municipalities and school districts, almost always require payment/performance bonds. Since the filing of the wrong kind of claim is worthless, as in this case, the actual owner of the project should be uncovered before agreeing to a contract. That way, the sub/supplier, can know what rights it may actually have before it needs them, and what steps it should take to protect them.
 
Don’t assume, even if you think you know the answer. For example, a “fire district” may exist to address fires in one town, but a different town may just have a fire department which is part of the town itself. If the project owner is the “fire district”, for example, then filing a lien with the town is not effective. The filing must be with the district. In a similar vein, this decision does not apply to municipal improvement authorities  where municipal mechanics lien filings shold be permitted.
 
Besides the mix of public and private ownership in this case, there are other variations in the forms of ownership. These can include different mixes of public and private involvement, odd-ball project owner entities like “Joint Meetings” or other authorities, and even not-for-profit organizations which sign contracts for construction work but do not have any interest in the underlying property or funds which can be attached or pursued by lien or bond claim. Other laws can cover colleges, for example, and not all of them are treated the same under the law. There can also be a Federal project in the mix. This unhealthy stew of potential project ownership interests can produce a reault like poor MasTec suffered.
 
So how would homework have helped MasTec, when it required a New Jersey appellate court to write a long decision to come up with the answer? First, many project manuals simply tell you who the owner actually is, such as, in the Advertisement for Bidding which is often included. If that doesn’t solve the problem, call the agency to get the correct information. With luck, you might get some documentation to support it. No, do not ask some “field guy” or lower level employee. Try its legal department; this is a serious business having important ramifications if you get it wrong.
 
In all likelihood, if MasTec had called the Improvement Authority’s headquarters before agreeing to take on the project, it would have learned the Improvement Authority was considered a State agency. Then, it should have known there were no municipal mechanics lien rights. Furthermore, MasTec could have learned there was no payment/performance bond in place, meaning, that it would also have had no bond claim rights.
 
But, there is a kicker to the story. With a bit more investigation, MasTec might have also learned about the leasehold granted to Sunlight. Then, when MasTech wasn’t paid, it could have exercised its proper remedy—filing a construction lien against the leasehold. Leaseholds are real, private property under the law. So, they are subject to construction liens, just like other forms of real, private property. Filing a construction lien was probably the last thing a contractor would have expected on a project presumed to be public works.  

DON’T MISS LEGAL DEADLINES DUE TO THE CORONAVIRUS

The simple passage of time kills legal rights. Now, with the Coronavirus causing unprecedented havoc, contractors may inadvertently overlook time limits in the law which place their future collection rights at risk. Most importantly, the laws governing lien claims and bond claims are not written in a way in which time limits can be extended by unexpected events—even national disasters. So while contactors and materialmen may be willing to allow good customers more time to pay their bills, and tolerate delays from others, they should check their files and makes sure they are not placing those rights in jeopardy.

What follows is a listing of the short time limits in various lien and statutory bond laws which are critical to meet, as well as some statutory claim notice information. Note that this list is not exhaustive, because there are other time limits, too, and other laws, such as “Prompt Payment Acts” or New York Trust Fund claims. For all bid protest issues, “ASAP” is still the rule despite the Coronavirus (to be counted in days, not months).

There are also issues about how time is calculated under each law, and these can vary. In most cases, the following “rule of thumb” will be adequate: corrective, punchlist and warranty work which a contractor must perform will not extend time. For this purpose, it is also safest to exclude any separate work items which were not required under the original contract or a signed change order. Best to err on the side of caution; get it wrong and you cannot fix it later. You can also consider multiple, additional filings later.

In the following table, any reference to “2nd Tier”, means that only those who supply labor or material to a subcontractor (or in some instances, to a supplier) need give a mandatory notice or make a filing.

Two other points must be made. First, contracts sometimes include “contractual” time limits that reduce the time available to do things like sue, demand arbitration, or to file claims. These can, and will, be enforced if their dates are missed.

Second, in these difficult times, information and services which ordinarily, are readily available, can be difficult to obtain. So, when planning, allow extra time to make sure deadlines can be met.

THE CONTRACTOR CATCHES A BREAK: UNJUST ENRICHMENT RIGHTS

I just helped a contractor win almost $700,000 for the value of its construction work, even though it had no contract with the losing company, and no construction lien or bond rights. That is a pretty rare occurrence in construction cases, but it worked by using an ancient legal doctrine called “quasi-contract” and a related legal theory called “unjust enrichment”. Understanding how these concepts work may help you get paid in similar situations, or alternatively, help you make sure you don’t get trapped into paying someone else.

The idea behind “unjust enrichment” is that a party who performs work with the realistic expectancy of being paid for it should still recover for its value even without a contract of any kind. Basically, the court makes up an “imitation contract”, more properly known as “quasi-contract”, and then imposes a duty on the party who received the benefit of the work to pay for it.  A classic example would involve an unconscious person who is taken to a hospital in an ambulance. Even though the unconscious person did not request the ambulance, the court presumes he would have done so if he were conscious, and imposes a duty on him to pay for the ride.

The courts are also bound by strict limits on the theory’s use. A key limitation, in New Jersey and New York, is that the beneficiary of the work would ordinarily recognize an obligation to pay the provider of the work. For this reason, a contractor cannot typically use it to jump over another contracting party in the contracting chain (called “privity of contract”). So, it is hard for a sub-sub to jump over a sub and recover directly against a GC; for a sub to jump over a GC and recover from an owner, or for a contractor to jump over an original project owner and recover from a newer owner. 

In one classic court decision, a landscaper placed some shrubbery around a home, but the homeowner died before paying for it. The home was then sold, but the new homeowner refused to pay the landscaper even though the new owner had gotten the benefit of the shrubbery. Here, the court refused to hold the new homeowner liable in quasi-contract to the landscaper because the new owner had no direct dealings with the landscaper. Thus, the new homeowner had no had no reason to believe it could be liable to the landscaper. This is one reason why contractors should be more diligent about filing construction liens and bond claims—jumping over is sometimes permitted.

For quasi-contract to apply, the work must also be performed directly for the party who should pay. Back-up promises or “guarantees” by someone else must ordinarily be in a writing they sign, with one major exception mentioned at the end of this article. For example, a GC’s “guarantee” to pay a sub-subcontractor for the work the sub-sub performs for a subcontractor is ordinarily only binding on the GC if in an authorized writing the GC signed. But, if the work performed by the sub-sub was directly for the GC, no signed writing is needed. 

So how did we help win almost $700,000? The two key words are “direct relationship”. Instead of the GC following the typical chain of contracting, and directing the sub to direct the sub-sub, the GC cut the sub out and both communicated and directed the sub-sub’s performance. As for the sub’s subcontract with the GC, it was ignored for this work. The GC told the sub-sub what work to do; scheduled the sub-sub’s work; spoke and wrote to the sub-sub, usually outside of the sub’s presence; met with the sub-sub, and did all the things a GC would ordinarily do with a direct sub—except enter into a contract with the sub-sub. Instead, after directing and controlling the sub-sub’s work, the GC tried to deflect any payment obligations by claiming they were the sub’s responsibility. The court would have none of that, finding in favor of the sub-sub and against the GC.

To win these sorts of cases, the key question is whether there was a direct relationship created with another entity outside the ordinary contract chain, which resulted in their direction and control of your work? And, if you are a GC who wants to avoid this potential trap, make sure that the sub is the only one who actually receives direction and control from you, even while letting the sub-sub know what is expected. For example, make sure all communications are directed to the sub, and cc the sub-sub. Similarly, any meetings must be with the sub who is given the direction, but can also include the sub-sub. Do not direct the sub-sub in the field, only the sub. Convey concerns to the sub and make sure the sub then addresses them with the sub-sub. Or, consider firing the sub and entering into a new subcontract with the subsub. 

Finally, don’t make oral promises to pay for someone else’s work in any event. While guarantees must be in writing to be enforced, another legal doctrine called “promissory estoppel” can still bind you to oral promises in some cases. You can find out more about it in our earlier print newsletter edition of Plumb Law, issue 51, entitled “Watch Me Pull a Contract Out of My Hat” where it is discussed in the context of both public bidding and performance of a project.

CONSTRUCTION LAW IS NOT FAIR!

Cartoon of Lady Justice and business man with hardhat holding wilting flowers

Instead of using this inaugural blog to go right into specific legal issues, I wanted to address something about “the Law” that quite a few of my clients have said over the years: “That’s not fair!” In many cases, they were right— “the Law” was not fair. But “the Law” is not supposed to be fair; it is only supposed to be “just”. If you understand the difference now, you might save yourself from some costly mistakes.

“The Law” is actually a mash-up of different pieces of written laws and older court decisions which judges must later glue together in order to make a whole. Many laws begin with “statutes” passed by Congress or a State government. Policies and political agendas often govern what becomes a statute, particularly in construction, and they can be contrary to a contractor’s interests. State or Federal agencies can then tack on “regulations” to the statutes, which are another form of law, along with municipalities and other governmental bodies, all of whom have their own concerns. Still other rules and bits of law can also get thrown into the mix, including old court decisions. Judges are supposed to follow and interpret these laws. They may then generate a decision which follows “the Law” but still feels unfair—because it is.

For example, New Jersey’s public bidding laws generally require bidders to list designated subcontractors who will perform certain trade work. There are far too many instances where a bidder who offered the lowest overall bid price accidentally left out a trade subcontractor’s name. As a result, the bid was rejected as “non-responsive” or “materially irregular”. That’s not “fair” to the bidder who made an honest mistake, and it’s not fair to the taxpayers who have to now pay a higher price to the second lowest bidder because of it. It isn’t even fair to the subcontractor who could have gotten the job, but lost out due to the clerical error. Nevertheless, the law does not permit a post-bid correction of this type of mistake, no matter how good the proof of an accident may be. By doing so, the sanctity of the bidding process from even the appearance of favoritism, bias or corruption is protected. So, legal policy over-rides not just fairness but common sense.

Fairness does have a place in the law if you know where to look for it, and more often than not, it is where a judge’s hands are not tied by a host of written laws and regulations. By way of example, I was once asked at the last minute to file a lawsuit against a payment bond, and I arguably met a one year statute of limitations by about 10 hours. The other side disagreed with my calculations, of course, and filed a motion to dismiss the lawsuit by asserting the claim was barred by the statute of limitations. On the day the motion was to be heard by the judge, he called my adversary and myself into his chambers for one of those “closed door” conferences like you see on TV shows. What he told us was that he wanted to see contractors paid for the work they performed. So, if there was any possible way to apply “the Law” to find the lawsuit was timely filed, he would do so. We were then told to go out and settle the case, and over the next week, we did. That was fairness at work in the real world of construction lawyering.

Areas of particular danger to contractors are where there are lots of written laws outlining specific practices to be followed or acts to be taken, and there is a “protected class” or group which “the Law” was intended to protect. So, areas of concern include, for example, wages and hours disputes, labor laws, environmental protection, and any reconstruction or repair of a single family home, condo or co-op. There is also some legislation protecting contractors, like their rights to prompt payment and lien laws. You just have to follow them carefully to get their full benefit. 

Knowing whether something is “just” as well as “fair” requires a healthy knowledge of the legal policies and issues which go into the subject. As with most things, it is better to find out before you commit yourself to a mistake than after the deed it done. And that’s not an unfair approach to a potentially unfair problem.