NJ Court Denies Contractor Summary Judgment On Subcontractor’s Claim For Contract Balances And Compensation For Extra Work – Duty Of Good Faith And Fair Dealing, “Pay-If-Paid” Clause, Payment Release, And New Jersey Trust Fund Act Considered

Titan Stone, Tile & Masonry v. Hunt Construction Group, Inc.
Civ. No. 05-3362, 2007 U.S. Dist. LEXIS 19489 (D.N.J. March 19, 2007)

The Court decided several motions for summary judgment filed by a prime contractor to claims of a subcontractor. Among the motions decided, the Court addressed the duty of good faith and fair dealing attendant to an obligation to evaluate payment applications, the breadth of a “pay-if-paid” clause, whether a monthly release executed with a payment application barred claims for extra work performed after the pay period in the attendant payment application and whether the plaintiff adequately plead its claim for violation of the New Jersey Trust Fund Act.

The College of New Jersey hired Hunt Construction Group, Inc. (“Hunt”) as the contractor for the construction of a library (the “Project”). Hunt entered into a subcontract with plaintiff, Titan Stone Tile & Masonry, Inc. (“Titan”) whereby Titan would install the exterior panelized wall system for the Project (the “Subcontract”). Titan filed suit against Hunt alleging that Hunt failed to fulfill its obligation under the Subcontract by failing to provide adequate design drawings in a timely manner, delaying Titan’s progress on the Project, failing to make payment for work properly performed under the Subcontract and failing to pass through payment that Hunt received from the Owner for work performed by Titan. Titan also filed suit against Hunt’s surety claiming that it failed to honor its payment and performance obligations under the respective bonds issued for the Project.

Among several motions filed for partial summary judgment, Hunt and its surety (collectively “Defendants”) moved for partial summary judgment alleging that Titan is barred from claiming entitlement to certain progress payments and retainage because the Subcontract required Titan to submit a “Monthly Statement of Subcontract” to Hunt with each payment application and Titan failed to submit the statement with payment applications 14 through 16. Titan argued that it would submit a pencil copy, or draft payment application, during each pay period. Hunt would then either suggest changes or approve the pencil copy payment application before Titan would submit its final payment application. Titan argued that Hunt never responded to the pencil copies for the payment applications 14 through 16 and thus Titan’s obligation to submit a “Monthly Statement of Subcontract” had not arisen. Titan concluded that Hunt’s failure to respond to the pencil copies was a breach of Hunt’s implied duty of good faith and fair dealing and therefore the Hunt could not rely on its own bad faith conduct to evade payment responsibilities. The Court denied Defendant’s motion for partial summary judgment, concluding that a genuine issue of material fact remained as to whether Hunt’s failure to respond to pencil copies of payment application constituted a breach of Hunt’s duty of good faith and fair dealing.

Defendants also moved for partial summary judgment, relying on the Subcontract’s “pay-if-paid” clause, asserting that Titan was not entitled to retainage because the Owner had not released retainage to Hunt under the general contract. For its part, Titan argued that under New Jersey law, a “pay-if-paid” clause cannot be read to shift the risk of collection to Titan. Further, the clause is merely designed to postpone payment for a reasonable period of time after the work was completed. The Court denied Defendant’s motion for partial summary judgment, holding that there remains a genuine issue of material fact as to whether any provision under the Subcontract constitutes a clear indication that Titan and Hunt had agreed that the collection risk would shift to Titan.

Defendants also moved for partial summary judgment asserting that Titan waived its overhead and extra work claims because it executed a monthly release on February 3, 2005. Specifically, Defendants argued that the monthly release waived and released all claims of any kind that arose before each release was submitted. In turn, Titan argues that the monthly releases did not apply to Titan’s claims for extra work and overhead because the release pertained to work performed up to November 18, 2004 – the end date of the payment period for the attendant payment application. Titan claimed that the monthly releases specifically excluded work performed and properly completed after the date of the payment application. The Court denied Hunt’s motion for partial summary judgment holding that there remains an issue of material fact as to whether the waiver provision should be read to waive all existing claims as of the date of the release or only claims arising prior to the attendant application for payment.

Additionally, Hunt moved for partial summary judgment on the grounds that Titan failed to adequately plead its claim for violation of the New Jersey Trust Fund Act (the “Trust Fund Act”). The Trust Fund Act protects those who have claims for labor, material and other charges incurred in fulfilling the contract between the governmental body and its contractor. Accordingly, money paid by the government to a public contractor constitutes a trust fund for contractor’s laborers or materialmen. Hunt’s primary argument was that Titan must be able to show that Hunt received money in trust from the Owner that was not distributed to other subcontractors. The Court denied Hunt’s motion, holding that under the Trust Fund Act, Hunt would be liable to Titan even if the funds to which Titan was entitled had been forwarded to another subcontractor.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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