Contractors, Know Your Contracts!

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While this is not a novel legal principle, the Appellate Division, in its unpublished opinion, Wallace Bros, Inc. v. East Brunswick Board of Education, Docket No. A-1432-15T3 (N.J. App.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.