New Jersey Construction Law Decision Examines Requirements for Personal Guarantees

New Jersey construction contractors and suppliers often have difficulty collecting money due them for their work or supplies.  One of the tools available to help ensure payment is including a personal guarantee in their construction contracts.  However, personal guarantees have certain requirements.  The Appellate Division of the Superior Court of New Jersey addressed this issue in the case of Extech Building Services, Inc. vs. E&N Construction, Inc., Shawn Roney and Joaquim Ferreira, et al.

 

Background

Extech Building Services, Inc., was the supplier of building materials on a construction project for the general contractor, E&N Construction, Inc.  There was a written six paragraph agreement in which Extech extended credit for the project to E&N.  The last paragraph of the agreement also had a provision for personal guarantees; however, the identity of the guarantors was not provided.  There were three signature lines.  Two had the names of Shawn Roney and Joaquim Ferreira, who were executives at E&N, which were signed; a third line was blank and unsigned.

Extech delivered building materials for E&N, however it alleged that E&N failed to pay $1,016, 267.65 for the supplies delivered.  Extech then sued E&N in the Law Division of the Superior Court of New Jersey in Bergen County to recover the unpaid funds.  It also sued Roney and Ferreira as personal guarantors.  The Court dismissed Roney and Fereira on summary judgment, finding that they had not signed the agreement in their personal capacities.  It later entered default judgment against E&N.  (The opinion does not explain, but it appears that Extech pursued the personal guarantees because it believed it would be unable to collect from E&N, a common problem.)  The judge also found that the personal guarantees could not be enforced because they were not contained in a separate agreement.

Extech appealed the dismissal of Foney and Ferreira to the Appellate Division of the Superior Court.

 

The Appellate Division Explains the Requirements for Personal Guarantees in New Jersey Construction Contracts

The Appellate Division reversed the dismissals of Foney and Ferreira.

The court explained that as a threshold matter, personal guarantees are enforceable under New Jersey construction law if in writing, as in all New Jersey business law. Since the purported guarantees were in writing, this threshold requirement was met.  Thus, when the underlying debt is unpaid,  a creditor can go after the guarantors for the full amount.

The key then becomes determining the intent of the parties.  Here, because the guarantee paragraph did not identify the guarantors, and because the signature lines did not identify the capacity in which Foney and Ferreiera were signing, the agreement was ambiguous.  In the case of ambiguity, it is for the jury to decide the intent of the parties, not the judge.

The Appellate Division explained that because the agreement did not identify who the guarantors were or what capacity Foney and Ferreiera were signing in, it was ambiguous.  Therefore the Law Division judge should  not have decided the parties’ intent, but rather should have left it for the jury to decide.  It also rejected the judge’s reasoning that the guarantees had to be in a separate document.  It therefore reversed the dismissals and remanded the case to the Law Division to proceed to trial.

 

The Takeaways

• Personal guarantees in construction contracts, like other contracts, are valid and enforceable as long as they are in writing and signed.
• Contracts should clearly state who the guarantors are and what they are guaranteeing.
• All persons signing contracts should be identified by their title and what capacity they are signing in, e.g., whether as a personal guarantor or only as a representative of the company.
• Personal guarantees do not need to be contained in a separate document to be enforceable.
• Personal guarantees are not the only tool which contractors and suppliers have to secure payment under New Jersey construction law. For example, they can also file a construction lien or sue under the New Jersey Prompt Payment Act, although these have specific requirements.
• Additionally, although not necessary for this decision, ambiguities in contracts are generally construed against the party which drafted the contract, which will be an additional challenge for Extech to meet when presenting its case to the jury. Thus, drafting enforceable contract language is extremely important.

 

Questions on New Jersey Construction Law

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