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Construction in Brief: 2013 Volume 1

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Pay My Lawyer: Fee Shifting Provisions in New Jersey

By Roy S. Cohen

Litigation expenses can make even the best litigation outcomes bittersweet. For that reason, whenever possible, parties take advantage of statutes and rules that force the losing party to pay for costs and attorney’s fees that were incurred in bringing a case to trial. Fee-shifting provisions in statutes such as the New Jersey Prompt Payment Act, the New Jersey Consumer Fraud Act, the Construction Lien Law, and the Offer of Judgment Rule provide opportunities to recover counsel fees and costs if successful at trial. These fee-shifting weapons can be equally effective in leveraging settlements, thereby helping to avoid unnecessary litigation and minimizing overall litigation expenses.

This article presents a brief overview of several New Jersey statutes and rules that contain fee-shifting provisions that can help you maximize your results at trial, or, at a minimum, force the opposing party to get realistic about settlement. Bear in mind that the application of these laws is fact-sensitive. Therefore, you should always consult with an attorney in order to make use of these legal options.

New Jersey Prompt Payment Act

The New Jersey Prompt Payment Act (“Payment Act”) is perhaps the most frequently invoked fee-shifting statute in construction litigation in New Jersey. The Payment Act reaffirms the basic principal that if a contractor or subcontractor performs work in accordance with its contract, and billing for the work has been approved, the contractor or subcontractor is entitled to be paid for the amount of work performed. The Payment Act also establishes that periodic payments will be due within 30 days after the billing date and that payment applications are deemed approved within 20 days of receipt, unless the owner or contractor issues a written statement setting forth the reasons for nonpayment. If payment is not made in a timely manner, the delinquent party will be liable for the amount owed, plus interest.

While these provisions are helpful, the final provision of the Payment Act is the potential game changer. It establishes that in the event that a civil action is brought in order to collect payment, the prevailing party “shall be” awarded reasonable costs and attorney’s fees. This unambiguous language puts defendant owners and contractors on notice that they should not withhold payment unless they have supportable grounds for doing so. 

The Consumer Fraud Act (CFA)

The New Jersey Consumer Fraud Act (“CFA”) was designed to prevent deception and misrepresentation in connection with the sale or advertisement of merchandise or real estate. The CFA is a powerful litigation tool because a party that is found to have violated the CFA may be assessed treble (triple) damages and may also be forced to pay the prevailing party’s attorney’s fees.

The CFA is not just a remedy for individual “consumers.” Unlike many other jurisdictions, New Jersey allows corporate entities to make claims under the CFA in litigation against other businesses. Over the last decade, however, New Jersey courts have narrowed the application of the CFA in the context of business disputes. While the CFA is still a viable and valuable cause of action, its application is particularly fact-sensitive.

The Construction Lien Law

It is critical for contractors and subcontractors to ensure that their lien claims are accurate and properly filed. Under the Construction Lien Law (“Lien Law”), if a court finds that a lien claim is without merit, willfully overstated, or not filed in the form, manner, or time required under the law, the claimant will be forced to forfeit all lien rights in the full amount of the lien claim. Wrongfully filed lien claim­ants also may be forced to pay court costs and reasonable litigation expenses incurred by the party defending against the lien claim.

Similarly, owners may be penalized if they maintain frivolous defenses to lien claims. If a court finds that a defense to a lien claim is without basis, the Lien Law provides that the party maintaining the defense shall be liable for all court costs and reasonable legal expenses, including attorney’s fees.

Offer of Judgment

Under the New Jersey Court Rules, a plaintiff or defendant may serve the opposing party with an “offer of judgment,” to settle the case for a sum certain. Under the Offer of Judgment Rule, if a plaintiff recovers a verdict in excess of 120 percent of its settlement offer, the plaintiff may be entitled to “reasonable litigation expenses” following non-acceptance of the offer, including pre-judgment interest and attorney’s fees. For example, if a plaintiff offers to settle a matter for $100,000, the defendant rejects the offer, and the plaintiff obtains $120,000 or more at trial, the defendant may be forced to pay interest, costs and attorney’s fees to the plaintiff. 

The Offer of Judgment Rule can work in a defendant’s favor as well. If a defendant makes an offer of judgment and obtains a verdict that is less than 80% of its settlement offer, it may recover attorney’s fees from the plaintiff. For instance, if a defendant offers to settle for $100,000, its offer is rejected by the plaintiff, and the defendant obtains a verdict in which it is assessed liability in an amount less than $80,000, the defendant may obtain costs and attorney’s fees from the plaintiff.

The Offer of Judgment Rule is not appropriate for every case and should be used strategically. It is typically best to restrict use of the Rule to cases where the amount in dispute is a sum certain or the case has a nuisance value to the defendant. It is also important to realize that the Rule is a double edged sword — if you file an Offer of Judgment, opposing counsel may be motivated to file a counter offer against you, in which case you may be susceptible to potential penalties.

Conclusion

There are numerous strategic considerations that parties must evaluate with respect to each of these fee-shifting options, which are all fact-sensitive in their application and subject to interpretation by both parties. If you are faced with a claim that exposes you to liability for attorney’s fees or are wondering whether you can take advantage of any of these statutes in your business disputes, it is critical to consult with a lawyer who is familiar with these specialized areas of the law to ensure that you make the best strategic decisions possible.

 

Roy is the Founder of the Firm and Daniella is an Associate, both practicing in the Construction Group. They can be reached at 215.564.1700, rcohen@cohenseglias.com or dgordon@cohenseglias.com.

What’s New

New Faces — New York

Cohen Seglias is pleased to welcome our new attorneys:

Chris Georgoulis – Managing Partner of the New York office, Construction — Chris joins Cohen Seglias as the Managing Partner of the New York office and a member of the Construction Group. Previously, he was founding member of Georgoulis & Associates PLLC. Chris has been practicing law for over 30 years in commercial liti­gation focusing in complex construction and real estate litigation. He represents contractors, owners, sureties, subcontractors, and developers in multimillion-dollar construction and real estate matters.

Joyce J. Sun – Partner, Construction – Joyce focuses her practice on complex construction litigation and has extensive experience preparing, analyzing, and litigating delay and suspension claims, default and termination claims, extra work disputes, and bid protests involving public construction projects.

Michael McDermott – Partner, Construction – Michael’s experience includes preparing, analyzing, and litigating complex construction claims including claims for delay, extra work, payment, and prevailing wages.

Monica Barron – Associate, Construction, Labor & Employment – Monica has experience litigating construction claims for delay and extra work as well as mechanics’ lien foreclosures, breach of contract claims, and insurance defense actions involving claims under the New York Labor Law.

Peter Plevitis – Associate, Construction – Peter focuses his practice on complex construction litigation and has extensive experience in litigating delay claims, default and termination claims, extra work disputes, insurance defense work, and mechanics’ lien foreclosures for both public and private contracts.

James Lianas – Associate, Construction – James focuses his practice on complex construction litigation and has extensive experience in litigating delay claims, default and termination claims, extra work disputes, insurance defense work, and me­chanics’ lien foreclosures for both public and private contracts.

New Faces — Philadelphia

Judge Gene Cohen (Ret.) – Partner, Commercial Litigation – Judge Cohen served as a Court of Common Pleas judge from 1988 until February 2005 presiding over several landmark cases. In addition, he was the supervising judge of an investigating grand jury, a civil motion court judge, a trial judge for the Civil Division, and principal civil major non-jury judge. Judge Cohen’s last assignment was as a team leader for the Commerce Court Program managing major commercial litigation. 

Dale Holmes – Of Counsel, Federal Construction – Dale has joined the Firm as Of Counsel in the Federal Construction Group. Dale has 30 years of experience as an attorney for the U.S. Army Corps of Engineers and as District Counsel (managing attorney) in Kansas City, St. Louis, and Louisville Districts. He served three tours as District Counsel in the Afghanistan Engineer District. During this time, he took part in one of the largest fraud cases to date involving the Army Corps of Engineers. Prior to joining the Firm, Dale represented clients in private practice on Government Contract Law matters, with a primary focus on work for clients in Afghanistan.

Promotions

In addition to our new faces, we are excited to announce that Lisa M. Wampler has been named a Partner in the Construction Group and Douglas C. Hart has been named Senior Counsel in the Commercial Litigation Group. 

Lisa Wampler – Partner, Construction – Lisa represents owners, general contractors and construction managers in complex matters involving all phases of the construction process, including negotiating and drafting contracts, and advising clients as to preparing claims for extra work, inefficiencies, delays, and changed conditions while construction is ongoing for both private and public sector projects.

Douglas C. Hart – Senior Counsel, Commercial Litigation – Doug maintains a general litigation practice, and has successfully defended and prosecuted claims in both state and federal court. His diverse practice focuses upon commercial litigation as well as various employment and discrimination matters, real estate litigation, and health care law.

 

Conway – Good News for Homeowners and Bad News for Builders

By Edward Seglias

This past fall a Pennsylvania appellate court ruled in Conway v. The Cutler Group that second homeowners who purchase homes from original owners of new construction can sue builders if a home is defectively built and, as a result, uninhabitable. What does this holding mean? Second homeowners of relatively new construction now have new legal rights but builders have new liability.

Background of Conway Case

In Conway, second homeowners, the Conways, bought a three year-old home from original owners who had contracted with Cutler in 2003 to build new construction in Exton, Pennsylvania. Approximately two years after buying the house, the Conways discovered water infiltration around the windows of their home. A building inspector found that the water infiltration was caused by defective construction, including missing and defective flashings, and an improperly installed stucco system. The Conways sued Cutler asserting that the builder breached its implied warranty that the home was constructed in a reasonably workmanlike manner and fit for habitation. Cutler filed preliminary objections to the Conways’ complaint, on the basis that the Conways did not have a legal right to sue for breach of implied warranty of habitability because the Conways did not have a contract directly with Cutler, and, therefore Cutler did not extend any warranties to the Conways. The trial court granted the b­uilder’s preliminary objections and dismissed the Conways’ case. The Conways appealed to the Pennsylvania Superior Court.

The Superior Court reversed, finding that the Conways had a right to sue Cutler for breach of implied warranty of habitability. The Conway court reasoned that buyers of a home have a reasonable expectation that the home will be reasonably well constructed and justifiably rely upon a builder’s skill and expertise in building a home that meets warranty standards and is habitable. The court explained that public policy dictates that buyers should not be forced to absorb the risk of latent construction defects in a home that are not apparent after a reasonable pre-sale home inspection. Thus, because the Conway court based its ruling on public policy considerations, it found that it was irrelevant that there was no contract between the Conways and the Builder.

Impact of the Conway Case

Before Conway, Pennsylvania trial courts were divided and inconsistent in how they dealt with second homeowners’ claims against builders, sometimes dismissing complaints and sometimes permitting cases to continue to trial. Not only were trial courts’ decisions against second homeowners internally inconsistent, such decisions lagged behind New Jersey and other states that have embraced the modern judicial trend of recognizing second homeowners’ rights to sue home builders. Thus, many second homeowners were denied any form of relief against builders and effectively put out of court because they did not a contract with the builder of their uninhabitable home.

The Conway case now provides Pennsylvania trial courts with direction on how to deal with second homeowners’ complaints against home builders. This is good news for homeowners, who now have a clear legal right to recover what could be significant damages associated with sometimes egregious construction defects. However, this case is bad news for residential home builders who now have potential exposure to an entirely new class of plaintiffs. Importantly, builders have exposure to a potential breach of implied warranty of habitability claim for twelve years from the date that the home was built.

While there is no magic contract language or legal way for a builder to shield itself from a potential breach of implied warranty action, often times there are defenses to such claims. For example, a builder could potentially argue that: (a) the defect is not latent (i.e.: the homeowner did not bring the claim within four years from the date that the defect was discovered); (b) damage to the home was caused by lack of proper maintenance and/or some action by the first or second homeowners; and/or (c) even in the case of true latent construction defects, the defects due not rise to such as level as to render the home uninhabitable. However, even where a builder has meritorious defenses, the cost of litigating and defending a lawsuit can be onerous. 

Does this Case Apply to Commercial Properties?

The Conway case gives guidance and direction with respect to claims alleged by second homeowners of residential new construction, but does Conway mean that subsequent buyers of commercial properties can sue the builder of non-residential construction for breach of implied warranty of habitability? The answer is probably not. First, a claim for breach of implied warranty of habitability asserts that a property is unfit for human habitation. The issue of habitability likely would not extend to commercial, non-residential properties. Second, the Conway opinion distinguishes between the claims of breach of implied warranty of habitability and breaches of other implied warranties. Thus, it is unclear whether the decision extends to other implied warranty claims, some of which may apply in commercial property contexts. Lastly, the Conway decision is predominantly based on public policy considerations of protecting “innocent” homeowners, such policy considerations generally are not at play in commercial contexts. Notwithstanding these considerations, it is possible, and in fact likely, that the Conway case will be relied upon by a subsequent purchaser of a commercial, non-residential property. At that point in time, it will be a decision for the courts as to how far they will extend the Conway decision. 

If you have questions about potential exposure to lawsuits in light of the Conway case, you should contact your attorney.

 

Ed is a Partner and Kate is an Associate with the Firm, both practicing in the Construction Group. They can be reached at 215.564.1700, eseglias@cohenseglias.com or kseligman@cohenseglias.com.

Pre-Employment Criminal Background Checks – Proceed, but Proceed with Caution

Due to the increased risk of hiring an employee who has a bad track record, or who appears more likely to become a liability to the employer because of his or her criminal history, many employers routinely perform, or are considering performing, criminal background checks of their job applicants. When considering this process, however, an employer is faced with an irreconcilable “Catch 22” situation. On one hand, background checks provide an employer with relevant information concerning the applicant, and are helpful for an employer to avoid a negligent hiring lawsuit or economic loss in the future. On the other, the use of criminal background checks can, and has, led to employment discrimination lawsuits in a number of circumstances.

The Equal Employment Opportunity Commission (“EEOC”), various courts, and numerous state and local jurisdictions have weighed in on this legal issue; however, the guidance provided thus far has been mixed.

In April of 2002, the EEOC released its Enforcement Guidance on the “Consideration of Arrest and Conviction Records in Employment Decisions of the Civil Rights Act of 1964,” warning private sector employers of potential litigation for misusing arrest and conviction records when making hiring decisions. Although the EEOC does not suggest that an employer refrain from inquiring into an applicant’s criminal history altogether, it cautions that a discriminatory violation may occur depending upon how an employer chooses to use the information. In essence, the EEOC cautions employers against using blanket employment policies that disqualify applicants solely based upon their criminal background, because such blind disqualification can disparately impact and/or discriminate against applicants because of their race or national origin.

Against this backdrop, and in what appears to be part of a nationwide crackdown on hiring policies that affect minority applicants, the EEOC recently initiated litigation against Pepsi Beverages Co. relating to Pepsi’s pre-employment screening process. In that lawsuit, the EEOC determined that Pepsi’s policy against hiring applicants who had been arrested or convicted of certain minor crimes had a disparate impact upon African Americans. In a settlement that will likely have long-lasting implications for employers nationwide, Pepsi agreed to pay $3.13 million to resolve the EEOC’s charges of race discrimination. More recently, the EEOC made similar allegations against Dollar General Corp. surrounding its criminal background check policy.

As illustrated in these cases, the EEOC has concluded that an employer’s use of a blanket disqualification policy limits employment opportunities for minorities, and that an employer’s use of arrest and conviction records to deny employment can be illegal when the underlying records are not relevant to the specific job at issue. The EEOC expects employers to conduct a case-by-case analysis of applicants with criminal histories, and to consider various factors when assessing an applicant’s criminal background.

In Pennsylvania, employers are already prohibited from utilizing blanket policy restrictions regarding criminal background checks as part of the hiring process. Although an employer is permitted to consider felony and misdemeanor convictions when making hiring decisions, such convictions may only be considered in the hiring process if they relate to the applicant’s suitability for a specific job. Therefore, a Pennsylvania employer can only use conviction records to disqualify an applicant if there is proof of a business necessity to do so. 

In addition to federal law, several states and cities have implemented restrictions on when an employer can inquire into an applicant’s criminal background. For instance, in July of 2011, Philadelphia enacted an ordinance precluding employers from inquiring into an applicant’s criminal conviction history before and during the application process and through the initial interview. From a practical perspective, Philadelphia’s “Ban the Box” ordinance prohibits queries regarding an applicant’s criminal background until after the initial interview.

In light of evolving federal and state laws, and the discriminatory safeguards established by the EEOC, an employer’s ability to obtain criminal information of applicants is limited. Nonetheless, employers should not be deterred from conducting criminal background checks as part of the pre-employment screening process. If an employer fails to conduct criminal background checks, and subsequently hires a convicted felon with violent tendencies, that employer could be exposed to significant liability. This risk is illustrated by a decision recently issued by the Indiana Court of Appeals in Santelli v. Rahmatullah, in which a motel was successfully sued by the estate of one of its guests who was robbed and murdered by a former employee. Had the motel conducted a criminal background check on the employee, it would have discovered that the employee had a history of violent crimes and theft. This recent example is one of a number of cases where employers have been held liable for the criminal conduct or violent acts of their employees.

In light of all of these issues, what is an employer to do? Given the success rate of the plaintiffs’ bar in pursuing such negligent hiring and retention lawsuits against employers, and the huge increase in lawsuits filed under these theories, an employer would be remiss if it did not consider utilizing criminal background checks as part of its screening process. However, an employer should perform criminal background checks with caution. If you have questions on the proper use of criminal background checks in the pre-employment screening process and/or potential lawsuits relating to this issue, you should contact an attorney to ensure that your company’s policies are consistent with federal and state laws.

Doug is Senior Counsel with the Firm and a member of the Commercial Litigation Group. He can be reached at 412.434.5530 or dhart@cohenseglias.com.

Potential Liability of a General Contractor for a Subcontractor’s Union Fund Obligations

By Jonathan Landesman

If your company is the general contractor (“GC”) on a project, and one of your subcontractors is facing claims of non-payment of pension fund contributions to a union fund – do you know if you can be held liable for the subcontractor’s delinquency?

Typically, whether or not a GC is liable for a subcontractor’s pension fund contribution delinquency is clear from the terms of the collective bargaining agreement (“CBA”): there either is a provision providing for such liability, or there is not. When there is such a provision, the best policy for a GC is to require its subcontractor(s) to provide proof of the payment of pension fund contributions as a condition to disbursing progress payments on a project. Such proof can be the remittance reports submitted to the union funds and cancelled checks, or a confirmation from the union fund directly.

If the CBA does not contain such a provision, it would seem to be the reasonable conclusion that there is no basis for any such a claim against a GC by a union pension fund. It is unfortunately not as cut and dry as that.

In a recent case, a court bent over backwards to allow the union pension fund to sue a GC to try and recover the delinquent pension fund contributions of its subcontractor. In this case, the subcontractor had entered into a settlement of a more than $1 million pension fund delinquency claim. However, the subcontractor defaulted on the settlement agreement and the union fund sued the GC to try and recover the subcontractor’s pension fund delinquency.

The GC asked the court to dismiss the case because the CBA did not in any way provide that the GC was liable for its subcontractor’s pension fund contributions. However, the court permitted the case to proceed.

The court ruled that the union pension fund was allowed to claim that the parties had established a past practice and that the court could find that there was an implied term in the CBA requiring the GC to guarantee its subcontractor’s pension fund contributions. Simply put, the court allowed the union fund to argue that a provision holding the GC secondarily liable for the pension fund contribution delinquency of a subcontractor should be “implied” — or written into — the CBA. The case is still active and the judge’s decision is being challenged. It is unknown if the decision will stand, in whole or in part.

There is a practical lesson to be learned here. Sometimes, a GC will enter into a joint check agreement with union pension fund whereby the GC agrees to pay a subcontractor in the form of a joint check payable to both the subcontractor and the union pension fund. In fact, this was part of the history in the case above, which the union fund argued should permit it to advance such a claim.

Joint check agreements are used because they can sometimes be a useful way to avoid costly problems on a project. However, a joint check agreement may give rise to unexpected potential liabilities if it is not prepared correctly — including but not limited to the problem for the GC in the case discussed above.

The bottom line is that if you ever consider using a joint check agreement, you must make sure it is properly drafted by legal counsel to avoid costly pitfalls. If you do not, you may find yourself on the other end of a claim you would scarcely expect.

Jon is a Partner and Mark is an Associate with the Firm, both practicing in the Labor & Employment Group. They can be reached at 215.564.1700, jlandesman@cohenseglias.com or mleavy@cohenseglias.com.