Appellate Division Explains Subcontractors’ Remedies for Non-Payment Under New Jersey Construction Law

Contractors’ Problems With Getting Paid

Our construction attorneys represent New Jersey contractors and subcontractors in construction litigation, arbitration and mediation.  One of the things we see over and over again, is that one of construction companies’ biggest worries is that they will perform all the work they agreed to and then not get paid, despite the fact that they met all the project’s specifications and did a great job.  It is a well-founded worry.  Companies or people who don’t want to pay devise many different schemes, sometimes claiming defects with the work, delay damages, failure to do proper paperwork, the excuses are as varied as is human imagination.  To be clear, sometimes these claims are legitimate, but sometimes they are not, and good contractors need to get paid to do the work and to stay in business.

Fortunately, however, New Jersey construction law provides remedies for these schemes.  Recently, the Appellate Division of the Superior Court of New Jersey issued a decision on these construction law remedies in the case of Petric & Associates, Inc. v. CCA Civil, Inc.  Although the decision was unpublished, it is important because it explores many of these remedies and lays out a roadmap for subcontractors’ remedies against unscrupulous contractors which don’t want to pay them, particularly some of the trickier issues under New Jersey’s Prompt Payment Act.

 

Background: The Petric Case

CCA Civil, Inc. is a contractor which was working on renovations to the Pulaski Skyway in Jersey City, Kearny and Newark, New Jersey.  It subcontracted with Petric & Associate, Inc., for it to install temporary work platforms and safety shielding.  However, when it entered into the contract it knew that the location of PSE&G’s high voltage wires caused a violation of New Jersey High Voltage Proximity Act, caused major safety issues, could not be moved, and would make work more difficult and more expensive for Petric.  This condition could not be observed during Petric’s walkthrough, and particularly Petric could not observe the proximity to where its would work would be.  The wires were not identified on any drawings provided to Petric.  However, CCA also knew that by not disclosing this issue it would be in a more advantageous bargaining position.  A prime consideration for Petric was prompt payment, because Petric was not in a position to fund the project because it was undergoing financial difficulties, which CCA also knew.

The total contract was for $6,765,000, but Petric’s owner testified they would have needed an extra $1,000,000 to do the work if he had known about the problem with the high voltage wires.  A change order for this work was issued, but it did not cover the cost of the work.  Under the contract time and materials formula, the change order should have been calculated to $697,000, rather than the $1,000,000 minimum for which Petric would have bid the job.  Of that, CCA would only pay $441,482.79, and then even failed to pay the final $66,221.04 of that.

As it turned out, the existence of the wires caused significant problems for Petric which were discovered only after Petric started working on the job.  It caused the plans to be altered, and forced Petric to change from one shift per day to three, and caused the work to be so intense that Petric’s owner actually slept in a trailer at the jobsite.  Nonetheless, it was agreed that Petric completed the job to CCA’s and the New Jersey Department of Transportation’s satisfaction.

However, CCA dragged out payment.  It caused Petric to miss payments to unions and vendors.  This resulted in Petric being debarred (essentially banned) from work on public contracts in New Jersey for three years, essentially putting Petric out of business.  CCA never paid in full before trial.

Petric sued CCA in the Superior Court of New Jersey in Hudson County.  After a two week trial, the jury returned a verdict awarding Petric $1,850,000, including $300,000 for fraud, $800,000 for breach of contract, $250,000 for violation of the New Jersey Prompt Payment Act (which the trial judge later reduced to the $66,221.04 CCA admittedly did not pay), and $500,000 in punitive damages.  The judge also ordered CCA to pay Petric $260,911.36 for its litigation costs and attorneys fees.

CCA appealed to the Appellate Division.  The Appellate Division upheld the jury’s verdict, with the interesting exception of the Prompt Payment Act violation.

 

Breach of Contract, and Breach of Contract Damages

The Appellate Division gave short work to CCA’s appeal of the finding that it breached its contract with Petric.  However, CCA also argued that the price it paid for the change order was on the agreed upon time and materials formula.  It argued that it could not have been more than $382,373.87 (the way CCA arrived at this number is not really important to our discussion, just that this number and many others were specific down to the penny).

The Appellate Division rejected this argument, too.  It explained that the purpose of compensatory damages is to compensate for actual loss, and while the computation of damages cannot be mere speculation, uncertainty does not prevent the award of damages.  The exact amount of lost profits is often hard to determine exactly.  Therefore damages do not need to be determined with exactitude, provided they were not duplicative of other damages.  The Appellate Division noted that Petric testified that various elements of its damages for breach of contract included the amounts of $255,517.21 (the difference in the what the actual value of the change order should have been and the amount actually paid), $66,224.04 (the amount admittedly due but not yet paid), $126,856.66 (NJ Department of Labor penalties caused by the failure to make payment), $50,556.56 for an improper deduction from payment by CCA, and other items described in trial testimony which equaled $745,570.44.  Thus, that number provided a reasonable basis for the jury to estimate $800,000, particularly since Petric was debarred.

 

Fraud, and Fraud Damages

CCA argued that Petric should not be allowed to recover for fraud (which then opened CCA up to the punitive damages) because Petric could only recover for breach of contract.  A line of federal court cases does say this.  However, Petric sued under New Jersey construction law in New Jersey state court, which rejects this line of cases.  Rather, under New Jersey construction law and New Jersey contract law, damages for fraud may be recovered even when there is a contract.  The key is when and how the fraud occurred.  If the fraud occurred during the performance of the contract – say, for example, a contractor said it did work that it did not – then recover is limited to breach of contract, eliminating punitive damages.  However, if the fraud is made to entice the other party to sign the contract – known as “fraud in the inducement” – then a claim for fraud may be maintained and punitive damages are recoverable.  This includes failure to disclose under certain circumstances.

In this case, the concealment of the problem with the high voltage wires directly reduced the price for which Petric was willing to do the work, and directly inflated its cost to do the work.  The Appellate Division therefore allowed the fraud award and punitive damages to stand.

The Appellate Division also found that the $300,000 awarded for the fraud damages was a reasonable estimate of the actual fraud damages, because Petric testified it would have bid the project at $1,000,000 because of the high voltage wires, and the proper contractual formula for the change order which the jury accepted resulted in breach of contract damages of $697,000, leaving a $303,000 difference.  Thus, the $300,000 was a reasonable estimate of compensatory damages attributable to the fraud, which did not duplicate the breach of contract damages.

 

Prompt Payment Act

It was not disputed that CCA had not paid Petric in full for the work it performed, even under the formula which CCA argued should be used to determine the amount owed for the change order.  However, the New Jersey Prompt Payment Act allows parties to agree among themselves to payment terms which differ from the Prompt Payment Act.  In this case, the contract had a provision that allowed CCA to withhold funds from Petric “to ensure payment of [its] obligations.”  If this seems harsh, it is.  However, that is what the Prompt Payment Act provides, and it still allows contractors such as Petric to recover for fraud and breach of contract.  The remedy to this harshness lies with the Legislature, however, and not the courts.

 

Punitive Damages

The Appellate Division also refused to overturn the punitive damages award.  Punitive damages are designed to punish and deter wrongdoers, rather than to reward the innocent party.  Fraud allows for punitive damages if the concealment was intentional and in “wanton and willful” disregard of the resulting “high probability of harm” to others.    Since there was testimony that allowed the jury to conclude that CCA had withheld the information about the potential violation of the New Jersey High Voltage Proximity Act in order to gain a lower bid from Petric – particularly when CCA’s employee testified that CCA knew Petric was in financial difficulty – the court found that the punitive damages award met these requirements and let it stand.

 

Attorneys Fees

The award of attorneys fees and litigation costs were based on two sources.  First, the Prompt Payment Act provides for violators to be ordered to pay the aggrieved subcontractor’s attorneys fees and litigation costs; second, the contract between Petric and CCA provided that the losing party in a breach of contract dispute would pay the litigation costs and attorneys fees of the prevailing party.  The Appellate Division vacated the award of attorneys fees and litigation costs because it could not determine what part of the award was for work done on the breach of contract claim for which Petric could recover its costs, and which was done on the Prompt Payment Act claim for which it could not.

However, the Appellate Division did not say that Petric could not recover its costs and attorneys fees.  Rather, it ordered this matter back to the trial court to apportion the costs between the claims.  If it turned out that all the work would have had to be done for the breach of contract claim even if there was no Prompt Payment Act claim, then the trial judge could still order CCA to pay all of Petric’s litigation costs and attorneys fees.

 

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