nj water environment association dealing with contract claims john napolitano & william...

NJ Water Environment AssociationDealing with Contract Claims

John Napolitano & William “Mickey” ConwayJohnson & Conway, LLPSeptember 12, 2011

2 Napolitano & Conway

04/18/23

Agenda1. Basics

2. Types of Claims

1.Claims by Contractor or Vendor

2.Claims by Owner

3.Claim Avoidance

4.Lien and Bond Claims

3. Litigation of Claims


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What is…A Contract• An agreement between two or more persons

•Creates an obligation to do or not to do a particular thing.

•Essentials• Competent parties & subject

matter• A legal consideration

mutuality of agreement and mutuality of obligations

A Claim• To demand as one’s own or as one’s right; to urge; to insist; cause of action; demand for property or money

Typical Contract• Professional Services Contracts include agreements with Accountants, Engineers, Architects and Attorneys

• Procurement Contracts include agreements for the purchase of equipment, chemicals, supplies, etc.

• Service Contracts include agreements for maintenance, laboratory services

• Construction Contracts include agreements for improvements to real property, including installation and repair of pipelines and physical plant improvements


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• Prevailing Wage Compliance Declaration N.J.S.A. 34:11-56.25 et seq.

•Equipment Certification as required by N.J.S.A. 40A:11-20 (Construction Contracts)

•Non-Collusion Affidavit as required by N.J.S.A. 52:34-15

•Bidder’s Corporation Resolution, evidence of the Authority to bind the bidder where bidder is a corporation or a partnership

•Bidder’s Checklist for Mandatory requirements N.J.S.A. 40A:11-23.2

•Bidder’s Qualification Form, which is a series of questions regarding the bidder’s history and previous experience

•Americans with Disabilities Act, 42 U.S.C. § 12101

•Affirmative Action - No Discrimination, N.J.A.C 17.27-5.2

Typical Documents Required •Bid Bond, as required by N.J.S.A. 40A:11-21; 10% of bid amount, not to exceed $20,000.00

• Consent of Surety, pursuant to N.J.S.A. 40A:11-22; required for all improvements to real property in excess of $100,000 an unconditional guarantee to provide the required performance and payment bonds (Construction Contracts)

• Statement of Ownership, pursuant to N.J.S.A. 52:25-24.2

•Subcontractor Identification Form, pursuant to N.J.S.A. 40A:11-16 (Construction Contracts)

• Bidders’ Acknowledgment of Revisions or Addenda N.J.S.A. 40A:11-23(a)

•Business Registration as required by N.J.S.A. 52:32-44

•Public Contractor’s Registration Form N.J.S.A. 34:11-56.51 (Construction Contracts)


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•Scope of Work: a general description of the work that is anticipated to be performed under the contract or the goods to be supplied.

• Integration of Contract Documents: most contracts provide that the contract documents include the contract general conditions, the drawings and the specifications.

• Subcontracts: most contracts provide that the contractor agrees to bind each subcontractor to the terms of the general construction contract.

• Permits: This sets forth who is responsible for getting the permits for construction and who pays permit fees.

Typical Contract Terms•Types of Payments

• Lump sum - contract is awarded based upon a single price

• Unit Price - provides for payment based upon individual increments of work

• Allowances - contract provides each bidder with a specific dollar amount for work that cannot be adequately specified

• Alternatives - additional or optional work that the owner may want done; usually dependent upon price

• Time of Completion: N.J.S.A. 40A:11-17 requires that the amount of working days for each contract be specified.


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•Liquidated Damages: A contract may provide for a daily damage amount for a contractor’s failing to complete the project on time. Liquidated damages are normally used when actual damages would be difficult to quantify and must bear a rational relation to what anticipated damages could be on the project. Extremely high liquidated damage provisions may be invalidated if a court determines that they constitute a penalty. N.J.S.A. 40A:11-11.

Typical Contract Terms cont.•Suspension of Work, no damage for delay provisions: N.J.S.A. 40A:11-11 provides that to limit a contractor’s remedy for the contracting unit’s negligence, bad faith, active interference, tortuous conduct or other reasons uncontemplated by the parties that delay the contractor’s performance to give a contractor an extension of time for performance under the contract is void under public policy. However, the provision can be drafted such to limit the contractor’s right to additional compensation to actions by the contracting unit and not third parties.


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Typical Contract Terms cont.•Prevailing Wages: A contract for construction, reconstruction, demolition, alteration and maintenance work shall provide that all contracts in excess of $2,000 in a case of an Authority and $10,750 in the case of a municipality shall require the contracting unit to pay prevailing wages for all contracts for work defined in N.J.S.A. 34:11-56.25 and require that certified payroll records be submitted to the contracting units for each employee on the project.

•Indemnity Provisions. Most contracts provide to the greatest extent allowable by law the contractor shall hold harmless and indemnify the owner, its employees and engineers for any and all claims that arise out of the contractor’s performance of the contract, including attorney’s fees and cost of suit.


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Typical Contract Terms cont.Termination Provisions

Termination for Default: contracts will provide for a termination of the contractor for his material failure to properly follow the contract specifications, violation of laws, failure to make adequate progress, general poor performance and bankruptcy of the contractor. These termination provisions must be carefully drafted and followed, including any and all notice provisions required. Generally, the termination provision will provide adequate notice be given to the contractor and a time for the contractor to cure his default.

Termination for Convenience: this provision provides that an owner may terminate the contract for reasons other than the default of the contractor. Generally, it will provide that in the event the owner terminates the contract for its convenience, the owner is responsible to pay the contractor for all of the work the contractor has performed to date, including reasonable costs of termination. The AIA documents also allow for the contractor to be paid for his anticipated profits of the work not performed.

Termination by Contractor: generally, the contract will allow a contractor to terminate its agreement with the owner in the event the owner’s failure to make timely payments in accordance with the contract provisions. Again, there is normally a notice provision which will allow the owner to cure any default.


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Typical Contract Terms cont.•Changes to Work Provisions: a contract shall provide for changes in the work which were not originally contemplated in the original design and/or scope of work. These provisions normally provide that the contractor submit a price, either lump sum or unit, for the changes in the work. The best practice would be that these changes be approved as to scope and price prior to the work beginning and an executed change order be issued. In cases where a price cannot be agreed to, many contracts provide that the owner may direct the contractor to perform work on a time and materials basis.

• Application for Payments• Payment for stored

materials: as provided for in N.J.S.A. 40A:11-16.4

• Retainage - N.J.S.A. 40A:11-16.1 limits retainage to two percent (2%) for contracts in excess of $100,000.

• Final Estimate Payments - provides for the release of retainage, all documents that need to be provided including warranties, release of liens from contractor and subcontractors.


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Typical Contract Terms cont.•Liens: provision addresses the times when a subcontractor or material man may file a lien against the project funds.

• No Waiver Provision - a general provision that provides that in the event the owner does not enforce a specific provision during the course of the contract term, it does not waive enforcement of the provision in the future

• No Oral Agreement Provision - the contract may only be modified by a writing executed by all parties.

• Warranty/Maintenance Period - Typically contractor warrants that its work is in conformance with the specifications and drawings and agrees to repair any defective work for a period of one year.

•Maintenance Bond, supplying of a maintenance bond up to two years in accordance with N.J.S.A. 40A:11-22.

• Alternate Dispute Resolution - Pursuant to N.J.S.A. 40A:11-50 all construction contracts must include an ADR provision as a prerequisite to filing a lawsuit. This provision does not apply to bid protests.

• Insurance Provisions - Provides the types and amounts required for the contractor to provide. Usually requires the owner, employees and consultants list as additional insured on the policy. These provisions should be reviewed by the owner’s insurance consultant to determine if the policies as specified are generally available in the market place to contractors.


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Bid Challenges – The Initial Claim cont

Type 1 – Challenge to bid awardThe law requires that a publicly

bid contract be awarded to the lowest responsive and responsible bidder or vendor. Challenger alleges that it is the lowest responsive and responsible bidder. A bid challenge to the award must be based upon a material aspect of the bid. The most common challenges refer to the failure of the low bidder to submit the proper paperwork with its bid.

The typical nonwaivable defects are:

•Failure to• submit a consent of surety.• submit an equipment list.• enclose business registration certificate.• enclose subcontractors identification form pursuant to N.J.S.A. 40A:11-16, statement of ownership pursuant to N.J.S.A 52:25-24.2, bid bond as required by N.J.S. A. 40A:11-21.

•Ownership Disclosure


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Bid Challenges – The Initial Claim contType 2 – Challenge to

SpecificationWhen a bidder or supplier at least three days prior to the bid opening file a challenge to the specification usually alleging the specification unfairly favor a particular contractor or product. A successful challenge will result in a rebid with revised bid documents.


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In order for a contract claim for additional compensation to be valid, the contractor must prove both entitlement and actual damage. To show entitlement, the contractor must show that claim resulted from events or situations not the fault of the contractor and measurable additional expense.

1. Extra Work – The simplest claim for additional compensation usually arises when contractor alleges it was required to perform work or supply items that were not set forth in the bid documents

2 .Differing Site Conditions - The contractor alleges the situation it encountered in the field was different from that which was indicated in the bid documents and as a result it incurred additional expense.

3. Delay Claim – The contractor alleges the project has taken longer than scheduled and as a result it incurred additional costs

Claims by Contractors or Venders


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4. Weather Delays – The contractor alleges as a result of unusually severe weather the project completion was delayed or its productivity was reduced causing additional expense.

5. Time Extensions – A request for additional time to complete the project it may or not include a request for additional compensation

6. Municipal Mechanics Lien – A claim by the general contractor or subcontractor for money it earned but was not paid. It places a lien on the contract funds in the possession of the owner.

7. Prompt Payment Claim – A claim by a contractor that owner failed to make payment in a timely manner as required by statute. The law entitles the contractor interest on those payment not made timely.

Claims by Contractors or Venders cont


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1. Liquidated Damages – A per diem amount as set forth in the

contract the owner is entitled to from the contractor for each day the contractor is late in completion of the work. Delay in completion must be the fault of the contractor.

2. Warranty Claim – A claim by the owner, as provided for by agreement, to have a contractor or manufacturer repair defective or broken work. Owner does not have to prove fault. It occurs after the project is completed and accepted and within the warranty period.

3. Defective Work – A claim by the owner that the contractor did not construct or supply work in accordance with the bid documents. The owner must prove the contractor was at fault.

Claims by Owners


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1. Contract Documents – Proper planning, investigation and review

of the contract documents will limit claim; spend the time and effort to develop a complete set of contract documents.

2. Schedule – Establish a rational project schedule for the project completion; tract the contractor submitted schedule and modify as necessary during construction. This will allow the owner to determine whether any delays are the result of contractor or owner actions.

Claims Avoidance


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1. Liens on Public Jobs (2A:44-126)

a. Who can file: GCs, Subs and second tier subs and suppliers.

b. Lien rights for certain public improvement projects are governed by the Municipal Mechanic's Lien Law (2A:44-126). Only certain public projects in New Jersey can be liened, those considered to be “municipal” projects: where the owner is a county, city, town, public commission, public board or municipality. Projects owned by the State and its subdivisions are not lienable. N.J.S.A.2A:44-126.

c. To preserve the right to file a lien on a Municipal job the contractor or supplier must file a notice within 20 days of the first performance of the work or delivery of materials. The notice must be filed with the municipal clerk, or appropriate official (depending on the owner.) N.J.S.A. 2A:44-128.

d. State and state subdivision jobs- no lien rights.

Lien & Bond Claims


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2. Bond Claims by Subs and Material men- Prior to commencing work or deliveringmaterials, a sub-sub-contractor or supplier who may be beneficiary on a bond must pre-file a notice to preserve its right to make a claim against a payment bond on a public job. Prior to delivery of materials notice must be filed with the Contractor by certified mail that Doka is a beneficiary under the bond. N.J.S.A. 2A:44-145. As owners, not so concerned about this b/c they are claims against the bond.

Lien & Bond Claims cont3 . Default- Performance Bond Claims Work: where contractor is in material default exercise rights under Performance bond to have bonding company complete the project a) What is material default- contractor terminates performance without justification; material deviation from schedule; failure to make payments to subs; uncorrected problems with the work; bankruptcy insolvency of contractor

b) How to Proceed- after cure period expires, notify bonding company and require Bonding Co to Perform; bonding company steps in shoes of contractor.


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Litigation of Claims1. Litigation v. Arbitration

1. Contract Arbitration/Agreed Upon Arbitration2. Pros and Cons- Arbitration less discovery, fewer depositions and

motions, etc. Also may get to Arbitration date faster; Litigation- easier to schedule (attorneys have to abide by court mandates vs consent scheduling in arbitrations); Cost paying for arbitrators

2. Litigation Procedure- Timing- process1. Bid issues and other construction claims often commenced with an

Order To Show Cause- abbreviated litigation schedule2. Complaint- standard mode of commencing case; Answer due in 35

days, other parties can be brought in3. Discovery- process by which information is exchanged between

parties. 1. Interrogatories are written questions, must be answered2. Document demands call for exchange of documentation related

to claims and defenses3. Depositions- question and answers between attorneys and key

witnesses4. Expert reports and depositions- key to most construction cases

are experts4. Motions- discovery issues; summary judgment; motions in limine5. Trial- timing, witnesses, jury/non-jury


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Litigation of Claims cont3. Preparation for litigation of Claims

1. Record keeping- organization of all job records including emails, meeting minutes, correspondence, requisitions, invoices, delivery slips, etc. Key because this is how the case is won and lost; when potential claims arise- attorneys should be involved in creating and preserving paper trail

2. Spoliation Issues- under NJ law, must be careful correcting defective work without notice to the defaulting contractor. Must provide an opportunity to correct and then, if not correct, provide opportunity to observe, photograph and document existing conditions prior to demolition, correction or covering up same

3. Experts- if not using own professionals consider claims or other expert prior to litigation (during job if large potential claim exists)

4. Indemnity Clauses- often determines who pays for litigation and who defends. Different types of clauses (indemnify and/or defend, option of owner, etc) dictate terms.


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Litigation of Claims cont5. Settlement Agreements- 95% of all cases settle. Some important terms

to include in settlement agreements: 1. If work is contemplated in settlement agreement, it is essentially a

new contract. Need scope and all protective clauses or refer to existing terms of contract. If extra payments for work, make sure within contract/LPCL threshold. If Bonding company is taking over work or finishing, avoid documents that release BC or its contractors from liability.

2. If payments from any party to owner or from GC to subs, include default provision in case payments are not made. Default should include automatic judgment, attorney’s fees and costs and interest and escalated settlement amount. Also look for personal guarantees in the event of payment.

3. Look to recover costs incurred to owner through existing contract provisions

4. Reason for settlement- juries unpredictable; avoid precedential bad decisions, very expensive, staff time, also at times jobs are ongoing so settlement helps get jobs completed which is key objective

nj water environment association dealing with contract claims john napolitano & william...

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