Current Legal Issues in Construction

1. Current Legal Issues in Construction Working With the New Jersey Turnpike Authority 2009 Presented by Michael F. McKenna, Esq. CIAP Counsel and James M. McMahon, Esq.

2. Working Together • In order to have Projects run more smoothly, economically, and efficiently, when the parties to them, from owner, to contractor, to engineer work together • The best time to deal with additional work, unexpected conditions, or delays is not at the end of a Project, after the fact, but when they are occurring • Don’t wait until the end of a Project to get together with the Owner, with the Engineer, with (gasp) attorneys or experts, to resolve Project issues

3. Hot Topics Facing Contractors • Increasing legislation, regulation, and a shrinking market place • Need to be aware of the potential legal pitfalls and minefields facing them

4. Time Pressures and Issues • Bidding • Increasing SDBE Requirements • Contract Performance • Office Management

5. Good News • Equitable Adjustment • MJ Paquet v. NJDOT • New Prince v. NJDOT • Implied Covenant of Good Faith and Fair Dealing • Pangborne v. NJDOT • New Jersey Contractual Liability Act • Pre-judgment interest • Specific incorporations of requirement of Equitable Adjustment

6. Growing Issues – Informality of Communications • The explosion PDA’s, Blackberry, I-Phone, wireless internet - allowed almost 24 hour communication capability • Email – Just as binding for evidence purposes as formal letter • Can be used to send information, or to confirm previous oral directives • HOWEVER, remember email, like letters, are project communications. Do not treat them “informally” and do not write something you wouldn’t put down on paper. • 24 hour Rule

7. “An ounce of prevention is worth a pound of cure” • Ben Franklin was right • Disputes over non-payment, delays, defective work, and parties entrenched in contrary positions • Team Building/Partnering • Fortunately NJTA has staff on hand like Rich Raczynski that are more concerned with getting projects done, than with fighting with contractors • “Not so much” with others

8. Issue Basics • Notice • DC-161 • Documentation • Photographs • Videos • Letters/e-mails • Schedule Updates • Damage computations • Team Building • Early Use of Experts • Others, yes including attorneys

9. Schedules and Costs – The Devils in the Details • Generally, contracts requires a contractor to produce and maintain a schedule • All to often schedule updates are missed, or not performed at all • Valuable tool • Schedule updates allow a contractor to detect and document Project progress issues early on • Important for negotiations, mediation/arbitration or trial • Similarly with Damages • Keeping Force Account type records • Separate cost coding in Project Financials

10. Death Penalty NJ Legislature designed the Act to give New Jersey “the toughest anti-pay-to-play laws in the country Violation of which can and more likely will led to a corporate death penalty – the inability to bid Public Works Projects for 8 months

11. Pay to Play – How $300 cost you millions • New Jersey’s Chapter 51 “Pay-to-Play” statute, N.J.S.A. 19:44A-20.13 to -20.25, prohibits state agencies from awarding contracts of over $17,500 to a business entity that has provided more than $300.00 in the preceding 18 months to any State or county political party, the governor, or a gubernatorial candidate. • Any shareholder of at least 10% of such an entity’s stock is likewise barred

12. Not so Safe Harbor • Safe Harbor provision: a contractor must not only request their donation back, but must RECEIVE the money within 30 days • Donee can refuse to return the donation; • The party’s office could burn to the ground; • A check could be lost in the mail; • A contributee could empty its bank account before issuing a refund check, • or there could simply be too much red tape to issue a refund check in time. • None of these factors will bring a contractor any solace - if the money is not back within 30 days, you lose

13. Code of Business Ethics & Conduct • All Government contractors should have written Code • A Code of Ethics will be considered as a mitigating factor by suspension/debarment officials and the DOJ • A Code of Ethics will help prevent the types of wrongdoing that contractors must now self-report • A Code of Ethics will help justify disciplinary action and avoid disputes with former or reprimanded employees • Required by contract w/in 30 days of award of any contract exceeding $5 million/120 days • The written Code must be made available to every employee engaged in performance of the contract • Can be done electronically

14. Business Ethics (cont.) • At a minimum, a Code should include: • Statement of Company’s commitment to integrity and commitment to abide by Code • Designation of Corporate Compliance Officer, or other individual, for employees to contact with questions or concerns • Descriptions of improper conduct and company policy that is to be followed • Requirement that employees report suspected instances of improper conduct, and instructions for how to do so anonymously and confidentially • Requirement that employees at all levels sign recognition of and agree to abide by Code and participate in training programs • Description of disciplinary actions for Code violations

15. Internal Control System • Establish standards and procedures to facilitate timely discovery of improper conduct in connection with Government contracts • Ensure corrective measures are promptly instituted and carried out • Minimum measures include: • Assignment of responsibility at high level and adequate resources to ensure effectiveness • Reasonable efforts to exclude as principals individuals with a record of improper conduct • Periodic reviews of business practices, procedures, policies, and internal controls for compliance • Internal reporting mechanism, such as an anonymous hotline • Disciplinary action for improper conduct • Timely disclosure of violations • Full cooperation with Government agencies

16. Mandatory Disclosure • All federal contractors must timely disclose whenever, in connection with the award, performance, or closeout of a contract, the contractor has credible evidence that a principal, employee, agent, or subcontractor has committed: • A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; or • A violation of the civil False Claims Act; or • Significant overpayments • Disclosure must be made, in writing, to the agency Officer of the Inspector General, with a copy to the Contracting Officer • The reporting requirement continues until 3 years after final payment on any Government contract

17. NJ Fraudulent Claims Act • Enacted on January 24, 2008 • Good News – yet to raise its ugly head • Patterned after Federal FCA, allows State or private individual to bring action for fraudulently submitted requests or demands, under a contract or otherwise, for money, property, or services • Applies to State Project, or Projects where State will provide portions of the money requested • Possible local municipal projects that receive State funding

18. NJ Fraudulent Claims Act (cont.) • Knowing as defined by the act is: • Actual knowledge of fraudulent submission • Acting in deliberate ignorance of the truth of the submission • Reckless disregard to the truth of the submission • Unlike common law fraud, the Act does not require a specific intent to defraud.

19. NJ Fraudulent Claims ActViolations • Penalties under the act can range from $5,500-$11,000 per individual violation. • Payment requests with multiple line items could lead to multiple individual violations • In addition, the State can receive treble damages, and be awarded attorneys fees and costs. • If NJ follows Federal law, only actual damages sustained, i.e. paid, would be trebled • Lack of actual damage would NOT preclude awarding of attorneys fees

20. Current Issues Non-Payment Pay when Paid Clauses Liquidated Damages Lane Rental or Lane Occupancy Charges

21. Non-payment to GC or to Sub • What you can do depends on many factors • If you are the General Contractor your options are limited • If you are working as a Subcontractor • Payment Bond • Lien rights • Miller Act/Little Miller Act • Be careful of time constraints and procedures

22. NJ Prompt Payment Acts • There are Two Prompt Payment Acts • N.J.S.A. 2A:30A-1; 2 • Enacted in 1991 • N.J.S.A. 52:32-40; 41 • Enacted a few months after N.J.S.A. 2A:30A-2 • in early 1992 • AMENDED N.J.S.A. 2A:30A-1; 2 • Amended September 2006

23. N.J.S.A. 52:32-40 • Act applies to State Projects • Applies to Payments from State to General Contactor; AND (NJSA 52:32-32 through 39) • Payments from General Contractor to subcontractor

24. N.J.S.A. 52:32-41a • Certification Requirement • Prior to the State issuing a progress payment, general contractor shall certify to the State that subcontractors/suppliers have been paid amounts due from the prior progress payments and shall pay amount due from current progress payment; OR • General contractor certifies that there exists a valid basis under the subcontract to withhold payment from the subcontractor/supplier.

25. Failure to Certify • Originally the Bill provided for the State to stop progress payments until a dispute was resolved. This original provision was removed via amendment. • Subcontractor/supplier is entitled to the amount due plus interest at the prime rate plus one (1) percent, starting 10 days after payment to the general contractor In the event that no valid basis existed for withholding of the payment, subcontractor/supplier is also entitled to court costs • In event suit is filed, and general contractor is found to have had a valid basis for withholding payment, general contractor is entitled to court costs.

26. N.J.S.A. 2A:30A-1; 2 • Applies to Public and Private Projects • Applies to BOTH Prime Contractors and Subs • Payment to be made to Prime w/30 days of contractual billing date. (Subcontract payment timeframe remains 10 days after Prime receipt of payment.) • Billing deemed approved by owner 20 days after receipt. (Unless written notice of amount being withheld and why)

27. Breach of Prompt Payment Act • If Payment is not made within timely manner, then liable for amount owed plus interest at prime plus one (1) percent • IN ADDITION • Contractor or sub, may on seven days written notice, stop performance without penalty, provided: • There is not provision of written notice of amount being withheld and reason for withholding • Payor is not making a good faith effort to resolve reason for payment being withheld • Certain Emergency and special federally funded projects are exempt from this walk of remedy

28. Breach of Prompt Payment Act(cont.) • The prevailing party is entitled to collect attorney’s fees • All contracts between owners, prime contractors, subcontractors or sub-sub shall provide that disputes regarding whether a party has failed to make payments required pursuant to this section may be submitted to a process of alternative dispute resolution. • Early versions of this bill made ADR of prompt payment disputes during the course of the contract mandatory. The mandatory nature of this process was removed from the final bill.

29. Paid-if-Paid Clause • Fixture Specialists, Inc. v. Global Construction, • Prior to 2009, it was unclear as to whether New Jersey would enforce a Paid if Paid provision in a contract. The courts uniformly rejected such provisions as not clearly transferring the risk of non-payment to the subcontractor, while leaving undecided the hypothetical possibility that a perfectly worded clause shifting such risk could be drafted and upheld. • In addition many states, such as New York and California have recently ruled that such provisions are as a matter of law void, holding such clauses as being a violation of public policy and contractors lien rights.

30. Paid-if-Paid (cont.) • Express language employed in the Payment clause in the subcontract clearly provided that the parties intended to shift any and all circumstances of the Owner’s nonpayment to the Subcontractor, not the General Contractor. “Undoubtedly, the all-encompassing nature of the phrases ‘never be obligated to pay’ and ‘under any circumstances’ clearly and unambiguously expressed that [Subcontractor] has agreed to assume the risk of the Owner’s nonpayment.”  • New Jersey’s anti-waiver statute of the construction lien law does not preclude the subcontractor from filing a construction lien against the owner, even though the obligations of the general contractor to pay the subcontractor are not technically due because the condition precedent established by the “pay-when-paid” clause of the subcontract has not been met.  • Plaintiff is not without a remedy in this instance, because it has the right, pursuant to Thomas Group, to obtain a lien against the owner without regard to the condition precedent imposed by the payment provision contained in the subcontract. 

31. Lane Occupancy Charges • 108.1 (NJDOT Standard) 107.12(NJTA Supp.) • Separate from Liquidated Damages • Charges Contractor $10.00 per minute, or $10,000.00 per day for failure to have lanes open as per scheduled time (Up to $20,000 as per NJTA Supp Specs) • Under NJDOT specs, not only do they attempt to assert penalties for Road User costs, but will also reduce your overall contract completion schedule.

32. Latest Information on Construction Law Lewis & McKenna Newsletter Website www.ciap.org Website www.lewismckenna.com Upcoming AGC Seminar

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