Collections for Construction Suppliers

Unless they’re providing related services (i.e., a subcontractor), construction suppliers are subject to the 4-year statute of limitations on sale-of-goods contracts.

In addition to breach of contract, construction law provides several statutory remedies for unpaid suppliers. These statutes don’t focus on suppliers specifically, but include them in general payment rules for construction projects.

Depending on the statute, some of these remedies apply only to private (non-government) projects, some apply only to public (government) projects, and some apply to either.

Private (Non-Government) Projects – The Construction Lien Law

In the contractual hierarchy, the term “first-tier” refers to a general or prime contractor. “Second-tier” refers to a subcontractor or supplier in privity with the general contractor, and “third-tier” refers to a sub or supplier in privity with the second tier.

The Construction Lien Law (the “CLL,” NJSA 2A:44A-1, et seq.), which applies only to private projects, gives unpaid first, second, and third-tier claimants the right to file a lien on the improved property.

The contractor’s lien is for the balance of its contract with the owner (called the “lien fund”). A second-tier sub or supplier’s lien is for the balance of its own claim against the contractor, but limited by the lien fund. Meaning, if you’re a sub or supplier, your lien can never exceed what the owner owes the prime, since that would require him to pay twice. The same rule applies to third-tier claimants.

For residential projects, you must first file a Notice of Unpaid Balance with the county clerk where the property’s located, and then serve the owner and anyone above you in the contractual chain. The notice is due 60 days after you last provided services or materials, and you must serve it within 10 days of filing. Then you must file the lien itself with the country clerk within 120 days after last performing.

By contrast, commercial projects don’t require a pre-filing notice. However, you must file the lien within 90 days after last performing.

You then enforce the lien by suing to foreclose it. The purpose of this suit is to sell the property to pay you. The deadline to file is one year after last performing.

Public Projects – 3 Statutes: The Municipal Mechanics Lien, Public Works Bond, and Trust Fund Laws

In contrast to the CLL, 3 statutes deal only with public projects.

The Municipal Mechanics Lien Law

The first is the Municipal Mechanics Lien Law (the “MMLL,” NJSA 2A:44-125, et seq.). This doesn’t create a lien on the land itself, since you can’t have a lien on government property; rather, it’s a lien on the monies owed by a public agency to the general contractor.

In this context, “public agency” doesn’t include the State, it means municipalities below the State level which are authorized to make public improvement contracts. Examples include counties, cities, towns, and public commissions.

A sub or supplier’s lien attaches to monies due to the prime contractor which are still in the government’s hands. Meaning, once the public agency pays the contractor, the lien is moot. To obtain this lien, you must file a notice of claim before the contractor completes the job, or within 60 days thereafter. Third-tier claimants must also notify the agency in writing within 20 days of first providing services or materials.

Once you file a valid lien with the agency, it must hold project funds in the amount of your claim until it’s resolved. The agency may (but isn’t required to) notify the contractor and any other interested parties. If it does, they have 5 days to challenge the lien, otherwise, the agency can pay you.

If any interested parties challenge your lien claim, or if the agency opts not to notify them, you can bring a lawsuit to enforce it. If you’re successful, the Court will order the agency to release the funds to you. The last day to file such a suit is 60 days after the project is complete – so if you wait until the last day to file your claim with the agency, you’d need to file suit the same day.

The Public Works Bond Act

The Public Works Bond Act (the “Bond Act,” NJSA 2A:44-143, et seq.) requires the general contractor for all public projects – State included – to file a performance and payment bond. This protects the government against the contractor’s nonperformance, and protects subs and suppliers against nonpayment.

To receive bond protection, third-tier subs and suppliers must notify the contractor that they’re beneficiaries. Since your bond rights only begin from the date of the notice, you’ll want to give notice before providing any service or materials.

To enforce your bond rights, you provide notice of your claim to the surety and anyone above you in the contractual chain. If still unpaid, you can sue to enforce the bond claim. However, you have to wait 90 days after your notice before you can sue, and need to file suit within a year after last performing. Effectively, this means that to preserve your right to sue, you must give notice before 9 months have passed.

The Construction Trust Fund Law

The Construction Trust Fund Law (NJSA 2A:44-148), unlike the MMLL, applies to money the government has already paid. It provides that a contractor on a public improvement project holds such funds in trust for the payment of subs and suppliers.

If a contractor receives public funds and fails to pay its subs and suppliers, the law may impose personal liability on its owners and officers, plus possible criminal charges.

This applies to all public projects at the State level and below. However, the statute doesn’t mention third-tier providers, and case law limits it to the second tier.

Private and Public Projects – The Prompt Payment Act

Finally, unlike the statutes discussed above, the Prompt Payment Act (NJSA 2A:30A-1, et seq.) applies to both private and public projects.

It provides in relevant part that a contractor has 10 days after receiving payment to pay its subcontractor or supplier. In turn, second-tier providers must pay the third tier within 10 days of receiving payment themselves.

The PPA not only provides interest on late payments (at the rate of Prime Plus 1%), but if you file suit under the statute, the prevailing party is entitled to reasonable attorney fees.

Summary

In summary, the CLL, MMLL, and Bond Act are all fast-tracked remedies. If you’re going to use them, you need to move quickly and be familiar with all the required procedures. However, they can be very effective tools for getting paid.

A standard collection action for breach of contract, which adds counts under the Trust Fund Law and PPA, not only gives you more time to react but also provides grounds for personal liability, statutory interest, and attorney fees. This can be very powerful.

If you’re a construction supplier, you and your collection lawyer should be aware of the various remedies available to you, what their requirements are, and how to best use them to your advantage.

I practice throughout New Jersey (all counties), and also accept cases in Southeastern Pennsylvania.

If you’re a construction supplier with past due invoices, the first step is to contact me. You can call, or ask me to review your claim free of charge with this quick, easy, and confidential form (click the red FREE Claim Evaluation button above). I will normally respond within one business day.