New Jersey Federal Court Holds that New Jersey Public Works Bond Act and Trust Fund Act Bars A General Contractor from Setting Off Potential Claims on Private Project Against Amounts Owed to Subcontractor on a Public Project

Atlantic City Associates LLC v. Carter & Burgess Consultants, Inc.
2008 U.S. Dist. LEXIS 25144 (D.N.J. Mar. 27, 2008)

The United States District Court for the District of New Jersey recently had to decide whether it was proper for a general contractor to set off potential claims on a private project against amounts owed to the same subcontractor on a public project. Relying upon the New Jersey Public Works Bond Act and New Jersey Trust Fund Act, the District Court concluded that it was improper for the general contractor to set off the amounts because a contractual setoff provision was insufficient to rise to the level of a waiver of the subcontractor’s rights under the Acts.

Keating Building Corporation (“Keating”) served as the general contractor on a private project in Atlantic City for which it contracted with Thomas Company, Inc. (“Thomas”) to perform roofing services. Keating also served as the general contractor on a public project at Rowan College for which it again contracted with Thomas to supply roofing materials and services. Each of the subcontracts between Keating and Thomas pertaining to the public project contained an assignment and setoff provision permitting Keating to “set off against any money due [Thomas] under this Subcontract any claim or claims against Subcontractor, whether arising under this Subcontract, or any other Subcontract or Subcontracts between the parties[.]”

Keating was paid in full for the public project but withheld $184,649.55 from Thomas claiming it was entitled to withhold payment under the setoff provisions because it alleged that Thomas breached the subcontract pertaining to the private project. Thomas challenged the Keating’s position arguing that the setoff violated the Public Works Bond Act (“Bond Act”) and the Trust Fund Act and moved for summary judgment on its claims that Keating violated both Acts.

The parties agreed that the Bond Act and Trust Fund Act applied to the public project. Noting that the Trust Fund Act creates a trust fund for subcontractors and suppliers when the government pays the general contractor, the District Court explained that such a trust is created so that the general contractor is inhibited from diverting the funds to something unrelated to the public project. There was no dispute between the parties regarding the applicability of and effect of these Acts. Rather, the dispute primarily revolved around Keating’s contention that the setoff provisions of the subcontracts constituted a waiver of Thomas’ rights under the Acts.

Turning to contract interpretation principles, the court attempted to determine whether the setoff provisions were knowing waivers of Thomas’ statutory rights. The court also turned to previous court rulings regarding the waivability of statutory mechanic lien (as opposed to the more recent Construction Lien Law) rights since New Jersey courts had not yet addressed the issue of the waivability of rights under the Bond Act or Trust Fund Act. The court analyzed lien waiver cases which universally held that “clear and unmistakable” evidence of waiver was necessary to demonstrate that a party waived its statutory rights. As a result, the District Court concluded that the setoff provision did not function as a waiver, in part, because it fell under the heading “Assignment” and because there was no indication in the language itself that the provision was a meant to waiver any statutory or other rights. Without reference in the subcontract to the fact that Thomas was waiving its rights under either Act, the court concluded that “clear and unmistakable” evidence was lacking to justify a finding of waiver.

Ultimately, the District Court concluded that Thomas was an intended recipient of the protections of both the Bond Act and the Trust Fund Act and that there was no material issue of fact with regard to whether Thomas waived its protections under either Act. Accordingly, Thomas was entitled to payment of the $184,649.55.

This decision provides guidance to contracting parties as to the level of specificity necessary in an agreement when the parties intend to waiver rights, in particular, statutory rights. A clear and unmistakable expression of a waiver must be included in the agreement to be effective. It should be cautioned, however, that the courts have yet to determine whether rights under the Bond Act and/or Trust Fund Act can be waived.

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