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Dial Block Company, Inc. v. Mastro Masonry Contractors

2004 WL 3008751, 863 A.2d 373 (N.J. Super. App. Div. 2004)

PUBLIC CONTRACTS—Where there is no direct contract between a supplier and a general contractor in a public works project, the supplier is not protected by the general contractor’s payment and performance bond even if some payment checks from the general contractor were written to the subcontractor and the supplier jointly.

A general contractor entered into a public works contract. In connection with the contract, it obtained a payment and performance bond. The contractor hired a subcontractor to provide labor, material, and equipment. The subcontractor requested a quote from a materials supplier. The contractor then prepared an agreement by which supplier’s bills to the subcontractor would be paid with checks from the contractor made payable jointly to the supplier and the subcontractor. At some point, the contractor stopped issuing joint checks and began paying the subcontractor directly. Approximately fourteen months later, the supplier stopped shipping to the subcontractor because it was owed a significant amount of money. It then asserted a claim under the bond.

The New Jersey Public Works Bond Act provides that any beneficiary of a payment bond who does not have a direct contract with the general contractor furnishing the bond shall, prior to commencing any work, provide written notice to the contractor that it is a beneficiary. The lower court held that if the agreement constituted a direct contract, the supplier could seek payment under the bond without otherwise notifying the contractor that it was a beneficiary of the bond. Here, the lower court concluded that the payment agreement did not constitute such a direct contract. It therefore denied the supplier’s claim.

On appeal, the Appellate Division pointed out that a “direct contract” is not defined in the Act. The purpose of the Act is to protect material suppliers, working on public projects, from a general contractor’s insolvency. It was amended in 1996 to clearly define the risk assumed by the surety issuing the bond. The amendment identified potential beneficiaries under the bond by requiring written notice prior to beginning work.

In this case, the supplier wanted to ensure that it would be paid by the subcontractor, so it asked the general contractor to issue joint checks. It was for that purpose that the general contractor agreed to issue the checks. The contractor was not agreeing to become obligated to pay the supplier for the materials supplied to the subcontractor. The Court found that the joint checks represented the money due from the contractor to the subcontractor and not from the contractor to the supplier. The direct contract to provide materials to the project was between the subcontractor and the supplier. Thus, the Court concluded that no direct contract was created within the meaning of the Act and the subcontractor was not protected by the bond.

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