Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner $250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.

Last week, New Jersey’s Appellate Division re-affirmed the principle that a court must strictly apply the terms of a construction contract when determining a dispute between contracting parties.  Where the contract terms speak directly to the issue in dispute, a court may not employ equitable considerations to determine the dispute even if the court believes that strictly applying the contract terms would be unfair to one of the parties under the circumstances.

While this is not a novel legal principle, the Appellate Division, in its unpublished opinion, Wallace Bros, Inc. v. East Brunswick Board of Education, Docket No. A-1432-15T3 (N.J. App. Div.  Nov. 9, 2017), reiterated this tenet in reversing a trial court that granted summary judgment to a general contractor that claimed it was owed final payment on a school construction project because the school board had waited too long to object to the contractor’s work.  The Appellate Division found that there were numerous material factual disputes between the parties when examining their allegations and the language in the parties’ contract.  It, therefore, reversed the trial court’s judgment, and remanded the case back to the trial court for further proceedings.  Critically, it appeared from the facts proffered by the school board that the contractor had not yet complied with the contract’s provisions regarding the right to receive final payment, such as the contractor’s obligations to provide standard close-out documentation and its failure to complete punch-list work.

Wallace Bros. serves as a reminder of how important it is for a contractor to review and, where possible, negotiate the terms of a contract before signing it, and then strictly comply with all contract provisions during the course of the project through completion.  In the public contracting context, as in Wallace Bros., the contractor generally must accept the terms of the contract on which it bids.  It then must strictly follow the procedures set forth in that contract when seeking payment for its work, particularly those provisions which explicitly set forth prerequisites to payment.  For example, change order provisions will typically require written documentation signed by the owner setting forth the additions or changes to the specified contract work, along with the price to be paid for that work, before such work is even performed, and therefore before payment is required to be made by the owner for any such work.

Also, as illustrated in Wallace Bros., contractors must be sure to compile and maintain their close-out documentation throughout the project, so that when it is time to submit their close-out packages in connection with final payment, they are not delayed tracking down or locating items such as subcontractor lien waivers, as-built drawings, and manufacturer warranties.  Note that in the private contracting context, a contractor may attempt to negotiate all contract provisions to try to ease the burdens of onerous payment and close-out requirements, as well as other critical terms, such as dispute resolution provisions and requirements relating to the performance and inspection of the work itself.

In sum, contractors must stay on top of their administrative duties and responsibilities in connection with their contracts.  No contracting party wants a construction dispute to end up in litigation, but if it does, the contractor will want to ensure that it has done everything by the book (or by the contract) to avoid getting tripped up by a technical contract prerequisite with which it failed to comply.

New Jersey courts are continuing their trend of extending insurance coverage for third-party construction defect claims.  Following last year’s NJ Supreme Court decision in Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, 226 N.J. 403 (2016), which broadly interpreted the standard CGL policy to extend an insured developer’s coverage to include claims of damage caused by the work of subcontractors, the New Jersey Appellate Division recently issued a published decision approving a trial court’s use (though not its application) of the “continuous trigger” theory of insurance coverage to third-party construction defect claims, thereby, potentially extending coverage in such cases over multiple policy years.

In Air Master & Cooling, Inc. v. Selective Insurance Co.,  A-5415-15T3 (N.J. App. Div. October 10, 2017), the Appellate Division reviewed a trial court’s decision in a declaratory judgment action filed by a subcontractor against two of its insurers.  Those insurers had declined coverage and refused to defend the subcontractor in a construction defect litigation filed by the condominium association (the “Association”), on whose 101-unit building the subcontractor had performed certain HVAC work on the roof and in each individual unit.  The Association and certain unit owners claimed damage due to progressive water infiltration, which they attributed to defective workmanship, and the subcontractor was joined in the litigation as a third-party defendant.

The subcontractor had performed work at the building from November 2005 through April 2008.   In early 2008, unit owners began to notice water infiltration into their units and resulting damage.  A newspaper article published 2010 detailed the 2008 discovery of leaks by the unit owners.  In May 2010, the Association’s consultant issued a report identifying certain areas of the roof in need of replacement though noting it could not determine when the infiltration had occurred.

The subcontractor had three insurers from 2005 through 2015.  The insurer for the period November 2005 through June 2009, agreed to defend the subcontractor under a reservation of rights, as it was the insurer during the period the work was performed and at the time the first water infiltration was alleged to have been discovered.  The next insurer, Selective Insurance, provided coverage from June 2009 through June 2012, and disclaimed coverage, on the basis that the property damage was alleged to have manifested before the policy periods had begun.   The third insurer, with coverage from June 2012 through June 2015, also disclaimed coverage, and was dismissed from the subcontractor’s declaratory judgment case, without appeal, on the basis that its 2012 coverage commenced long after any leaks had started and any resulting damage manifested.

After some discovery was conducted, Selective moved for summary judgment, which was granted by the trial court.  The trial court applied the continuous trigger doctrine of insurance coverage in analyzing whether Selective owed the subcontractor a duty to defend the construction defect claim.  It determined conclusively, however, that the damage to the building had manifested itself before Selective’s June 2009 coverage began.

On appeal, the Appellate Division, while agreeing that the continuous trigger doctrine was applicable in the construction defect context, disagreed with the ultimate determination – or at least found that the record was not sufficiently developed to make that determination.   The appellate court, therefore, reversed the judgment in favor of Selective and remanded the case back to the trial court with guidance on the application of the continuous trigger doctrine in the construction defect coverage context.

The continuous trigger effectively grants continuous coverage to an insured in connection with a third-party damage claim from the date of the initial exposure to the harm through the date of the manifestation of the injury resulting from the harm.  The appeals court rejected the subcontractor’s attempt to extend the doctrine even further to extend to the date of “attribution” – that is, when the particular damage could be attributed to a particular insured.  Doing so would be akin to transforming policy to claims made policy from occurrence-based, and likely escalate premiums or deter policies from being written.  Instead, the court determined that the endpoint of the coverage, or manifestation (or “last pull of the trigger”), should be the date when the harm has sufficiently become apparent or manifests itself to trigger a covered occurrence.

The Appellate Division, guided by the precedential first-party coverage case, Winding Hills Condo Ass’n v. North American Specialty Ins. Co., 332 N.J. Super. 85 (App. Div. 2000), held that the manifestation occurs at that time of the “essential” manifestation of the injury, and not necessarily at the initial discovery of the injury.  The essential manifestation is “the revelation of the inherent nature and scope of that injury.”  In examining whether the May 2010 report (during Selective’s policy period) or 2008 unit owner observations of water infiltration (before Selective’s policy period) should be used as the manifestation or end date of coverage, the court found the record too sparse to make that determination.   There were no depositions, or other evidence, revealing who knew what and when about these construction defects, and the court refused to rely on hearsay statements of the unit owners in the newspaper article.

Accordingly, the court remanded the case back to the trial court for a determination of what information about the building defects at issue were or reasonably could have been revealed between the time of the unit owner complaints and the start of Selective policy in June 2009.   The appeals court also noted that the matter was further complicated by the fact that the water infiltration associated with the roof was not discovered until the May 2010 expert report, while the newspaper article does not mention the roof.  Thus, there were genuine issues of material fact as to, among other issues, when water infiltration problems on the roof first became known or reasonably could have been known.

The Air Master decision continues a trend in New Jersey jurisprudence of expanding, within reason, CGL coverage to insureds.  In particular, in construction defect cases, the courts have recently liberally interpreted policies and legal theories to afford more coverage to insureds.   Where construction defects cause progressive property damage, as in the common case of water infiltration, Air Master will help to guide insurers, insureds and their respective counsel in analyzing whether, based on the facts alleged by a third-party, coverage is available for particular policy years.   It is also likely to spawn additional discovery and expense in the underlying construction defect cases specific to those issues.

So, you properly file your construction lien claim within the time allowed by the New Jersey Construction Lien Law (“CLL”), and then timely send out a copy of the lien by certified and ordinary mail to the address of the condominium building where you performed your work.  All set, right?  Not so fast, according to a New Jersey appellate panel.

In the newly-issued, unpublished decision, Santander Condominium Assoc., Inc. v. AA Construction 1 Corp., Docket No. A-0525-15T3 (N.J. App. Div., October 13, 2017), the Appellate Division upheld a trial court’s decision ordering the discharge of a subcontractor’s construction lien claim upon the application of the condominium association (the “Association”) against whose property the lien was filed, and awarding attorneys’ fees and court costs to the Association.  While the subcontractor apparently followed the letter of the law in filing its construction lien claim, its fatal flaw lay in its defective service of the lien claim.

The subcontractor, which had performed façade repair work for the contractor of the Association, filed its construction lien claim after the contractor failed to pay the subcontractor for its work.  The subcontractor then sent the lien for service by certified and ordinary mail to the street address of the condominium property.  The CLL allows for simultaneous certified and ordinary mail service, but it must be made “to the last known business or residence of the owner or community association….”  The physical condominium street address was not the business address of the Association, which, like all corporations, had an easily discoverable registered agent address filed with the State.  Service, therefore, was defective.

While service is supposed to be made within 10 days of the lien filing, it may be made later and still be enforceable as long the owner/association is not materially prejudiced by the late service. Disbursement of funds by the owner/association in the interim, however, is, on its face, deemed material prejudice under the CLL.  In the Santander case, after the lien was filed, the Association paid the contractor in full on its contract, and, because the lien was deemed to never have been properly served, the CLL’s clear and unambiguous language required that the lien be deemed unenforceable, as there was no longer a lien fund against which the subcontractor’s lien could attach.

The court noted that, even if service had been made to the Association’s proper business address, the certified mailing of the lien had been returned unclaimed and the subcontractor had failed to present any evidence relating to the status of the ordinary mail.  Though not discussed in the decision, had the service address been proper, the subcontractor should, at the very least, have proffered evidence that the ordinary mail was never returned as undelivered by the postal service and, therefore, should be presumed to have been delivered to that address.

The court also affirmed the trial court’s award of attorneys’ fees to the Association under the CLL (N.J.S.A. 2A:44A-30(c)) because the Association filed its application to discharge a lien that the court deemed to have been filed “without factual basis”.

That last determination, however, is questionable at best, as the lien at issue appears to have been filed with a factual basis, but was deemed unenforceable solely due to a failure of proper service and the Association’s subsequent payment in full to the contractor.  Improper service should not be equated with a lack of a factual basis supporting the lien.  In fact, under a different section of the CLL (N.J.S.A. 2A:44A-15), which provides the bases for a determination of the forfeiture of lien rights based on an improper lien filing, the CLL defines “without basis” for purposes of that section as “frivolous, false, unsupported by a contract, or made with malice or bad faith or for any improper purpose.”   The failure to properly serve an otherwise factually supported lien does not appear to be accounted for in the language of the CLL as a basis for the award of attorneys’ fees.

In any event, the Santander  case does serve to illustrate the critical importance of properly and timely serving a construction lien claim.  When filing a lien against a condominium association or any other corporate real property owner, a claimant must do a corporate search with the State to ensure it has the proper business address for that entity.  Of course, there may be other ways to determine the proper last known business address of the owner/association, for example, through recent correspondence or documentation from that corporation, but the corporation’s registered agent address, as filed with the State, should always be deemed a valid address for service of a lien.  Without proper service, the lien will remain unenforceable, and to the extent the owner makes payment to its contractor prior to proper service, the lien fund available to a subcontractor or supplier is at risk of complete depletion.   If there is any question regarding the validity or service of a construction lien claim, it is always a good idea to consult an attorney well versed in the requirements of the CLL.

So you’ve managed to successfully file a construction lien claim in New Jersey.  Well, don’t then kick back and relax for too long, because if you fail to take action to enforce that lien claim within the limited time required by statute, the lien will be rendered unenforceable.  Under the New Jersey Construction Lien Law (“CLL”), a lien claimant must file a lawsuit seeking to enforce its lien within one year of the date of its last provision of work, services, material, or equipment.  This is a strict statutory deadline, which cannot be extended based on equitable circumstances.  It is important to note that the deadline is not one year from the date of the filing of the lien claim itself.  It is also important to ensure that the work, services, material or equipment, on which you are basing your last date of provision, was actually required to be provided by your contract, as the following case illustrates.

In the recent unpublished decision, WJV Materials, LLC v. Erin Contracting, Inc. (Docket No. A-2453-14T1, August 12, 2016), the New Jersey Appellate Division affirmed the trial court’s dismissal with prejudice of the claim in a supplier’s complaint seeking to enforce its construction lien claim.  The supplier had filed its complaint on May 2, 2014, which was more than one year after it provided its last delivery of materials on April 3, 2013.   The supplier attempted to argue that its actual last date of work was May 16, 2013, the date its quality control expert visited the site to review and approve the subcontractor’s work product.  The court rejected that argument, as the supplier had been hired solely to provide concrete to the subcontractor at the worksite, which it last did on April 3, and not to unilaterally inspect the work performed with the materials by the subcontractor.  There was no evidence in the record that the subcontractor contracted with the supplier to provide any such inspection services.  Note that this same issue may arise in connection with your initial filing of a construction lien claim, which, on a commercial project, must be filed within 90 days of your last provision of contracted-for work, services, material or equipment.

Many times after filing and serving a construction lien, the property owner or contractor for whom you worked will seek to immediately resolve your lien claim – or will file its own action to discharge the lien if it believes you filed a defective lien.  Often, however, a claimant will file a lien and no immediate action is taken by any party (or the lien is bonded, which still requires you to take timely enforcement action).   Filing a timely and valid construction lien claim is difficult enough.  Once you do so, it is critical that you not fall asleep at the switch and that you file your enforcement action within the time required by the CLL – that is, within one year of the last date of work, services or materials provided pursuant to your contract.