Case Law Summaries

Avon Brothers, Inc. v. Tom Martin Construction Company, Inc.

• Opinion Date: August 30, 2000
• Real Property Law
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CONTRACTORS; FIDUCIARY DUTY—In a cost plus construction contract, the general contractor does not have a fiduciary duty to the owner when negotiating price change orders with subcontractors; “pay when paid” clauses are enforceable so long as payment is made within a reasonable period of time.

A developer hired a contractor to build a factory outlet center. The contract called for the developer to pay the contractor “the cost of the work plus a fee of 3.5 percent of the work.” The contract was guaranteed not to exceed 15.1 million dollars, subject to potential change orders. The contractor hired several subcontractors to perform various construction tasks. After construction was completed, the developer withheld approximately one million dollars to the contractor alleging overpriced change orders. The developer argued that equipment rentals and labor costs could have been lower and that the contractor should have negotiated better rates. The contractor in turn, withheld various amounts to its subcontractors. The contractor and subcontractors filed construction liens against the developer under the Construction Lien Law, N.J.S. 2A:44A-1 et seq. and each brought timely suit against the developer to declare its lien valid. The subcontractors also sued the developer and contractor on various tort and contract theories for final payment on their subcontracts, and the contractor sued the developer for final payment on its contract. The lower court held in favor of the contractor. The developer appealed. The issue before the Appellate Division was whether the contractor owed a fiduciary duty to the developer when pricing change orders, or whether it owed the lesser duty by any general contractor under an arms length commercial construction contract. In support of its claim, the developer cited language in its contract with contractor which read, in part, “The contractor accepts the relationship of trust and confidence established by this Agreement . . . and covenants . . . to perform the Work in the best way and most expeditious and economical manner consistent with the interests of the owner.” The Appellate Division held that, “in the context of the entire record and the Brill standard, we agree with the Law Division Judge that no such [fiduciary] relationship could be found by a reasonable factfinder.” It recognized that the exact definition of a fiduciary relationship is “impossible of statement,” that an owner-contractor relationship, without more, is not a recognized fiduciary relationship as are those between a trustee and beneficiary, guardian and ward, agent and principal, attorney and client, director and shareholder, and between members of a partnership. The Appellate Division concluded that if the developer had any doubt or concern about the terms of any change order, it had the right to make inquiry with the contractor. It held that the actions of the Vice President of the developer approving the change orders was proof that the contractor was not unilaterally making decisions on its own and therefore no fiduciary relationship was created. With respect to the claims against contractor from its subcontractors, the lower court held that a “pay when paid” clause in a contract is valid and is enforceable for a reasonable period of time. The subcontractor argues that such a clause is either void as against public policy or is, at most, effective only to postpone a contractors obligation for a reasonable period. The Appellate Division concluded that a pay when paid clause represents an unconditional promise to pay, merely permitting payment to be postponed for a reasonable time, but not a condition precedent that would excuse the contractors payment obligation entirely. Further, the “reasonable time” for postponing payment has been held to include the time within which the general contractor is actively pursuing collection and while there remains a reasonable likelihood that the general contractor will actually collect the final payment due from the owner. Here, the subcontractor’s work was complete for more than three years and whatever the reasonable time was for the contractor to pay his subcontractors had long since passed.

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