In 2006, New Jersey enacted the “Prompt Payment Act,” codified at N.J.S.A. 2A:30A-1, et seq. (the “PPA”). The PPA establishes timelines for payment of invoices or requisitions submitted to both private and public entities and provides a remedy for general contractors and subcontractors when payment is wrongfully withheld by an upper-tier contractor or owner.
What contracts fall under the PPA?
It applies to virtually all public and private contracts entered on or after September 1, 2006, to improve real property within the State of New Jersey.
How does the PPA define improvement to real property?
“Improve” under the PPA is broadly defined as: to build, alter, repair or demolish any structure upon, connected with, on or beneath the surface of any real property; to excavate, clear, grade, fill or landscape any real property; to construct driveways and private roadways on real property; to furnish construction related materials, including trees and shrubbery, for any of the above purposes; or to perform any labor upon a structure, including any design, professional or skilled services furnished by an architect, engineer, land surveyor or landscape architect licensed or registered pursuant to the laws of this State. N.J.S.A. 2A:30A-1
Although the PPA includes a broad definition, not all work that may be thought of as construction work falls under that definition. For example, a contract between a homeowner and a lawn maintenance services company for maintenance and upkeep of land, including lawn mowing, is not considered a contract to “improve real property,” as that term is defined under the PPA.[1]
Who can make a claim?
- Prime Contractors who contract with an owner to improve real property.
- Subcontractors who contract to furnish labor, materials or other services to a prime contractor in connection with a contract to improve real property.
- Subsubcontractors who contract to furnish labor, materials or other services to a subcontractor in connection with a contract to improve real property.
What Payments fall under the PPA?
All “billings,” such as periodic payments, final payment, written approved change order or request for release of retainage.
What are the timelines for payments?
For Prime Contractors: within 30 calendar days after the billing date for work that has been approved and certified by the owner or the owner’s authorized approving agent.
For Subcontractors/Subsubcontractors: unless otherwise agreed in writing, within 10 calendar days of prime contractor’s (or subcontractor’s) receipt of payment for the work performed and accepted by the owner or the owner’s authorized approving agent or the prime contractor, as applicable.
What are the consequences of a late or untimely payment under the PPA?
- The payment amount under the contract;
- Interest at prime rate plus 1% for the duration of the late payment; and
- Where a civil action is brought to collect payments under the PPA, the prevailing party is entitled to reasonable costs and attorneys’ fees.
It sounds easy to make a PPA claim. What’s the catch?
The PPA provides defenses to an owner or a prime contractor in response to claims of non-payment. Specifically, to be entitled to payment, a prime contractor must have performed “in accordance with the provisions of contract with the owner.” This provision allows the owner to argue that the contractor did not do its work correctly, thus potentially avoiding liability under the PPA. The owner or its architect or construction manager (if authorized to do so) also has to approve and “certify” the invoices, which they might not do if they are aware of the PPA. Therefore, an owner can argue that it is not liable under the PPA if the design professional on the job, such as the architect, has not approved the prime contractor’s payment application.
Practice Pointer for Owners: For private projects, the PPA provides that a bill is deemed approved 20 days after an owner receives it unless the owner provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment. Thus, making sure you have procedures in place to calendar receipt of billings from contractors is important to protecting against PPA claims. In the case of a public project, an approval meeting of the city, town or agency must take place first, but only if the bid procedures and specifications specifically mentioned this requirement. You should find out if such a meeting will take place or has taken place, and whether approval was granted.
For subcontractors and subsubcontractors, the PPA permits the parties to agree in writing to alter the 10-day timeline for payment. This makes negotiating the payment terms in a contract even more critical.
PPA Claims: Where do they get resolved?
The PPA requires all contracts for the improvement of structures to include a provision stating that payment disputes have to be submitted to mediation and/or arbitration. The PPA, however, leaves many questions open, such as: is this a mandatory unilateral right given to the party claiming default under the PPA? Is the mediation or arbitration binding or just an attempt to resolve the dispute without a lawsuit in court? Could this lead to resolving disputes in two forums: alternative dispute resolution for the PPA claims and potentially litigation for other claims? These questions have not yet been resolved by the New Jersey Supreme Court, but this makes contract negotiation and review essential.
Bottom line? If you have performed work on a construction project and more than 30 days have passed since you submitted your bill without a payment, you may be entitled to a remedy under the PPA.
***Next month we will explore the NY Prompt Payment Act and whether it differs from the NJ Prompt Payment (spoiler alert- it does!)***
[1] See, TBI Unlimited, LLC v. Clearcut Lawn Decisions, LLC, No. CIV. 12-3355 RBK/JS, 2013 WL 1223643 (D.N.J. Mar. 25, 2013)
If you have any questions about this post or any related matters, please feel free to contact our Construction Law Practice Group.