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Hi-Tech Steel Erectors, Inc. v. TLC Drywall Construction

A-2531-07T1 (N.J. Super. App. Div. 2010) (Unpublished)

NEW JERSEY BOND ACT — The New Jersey Bond Act distinguishes between “first-tier” subcontractors, who have direct contracts with the general contractor for the work in question, and “second-tier” contractors, who lack a direct contract with the general contract pertaining to the subject work.

A general contractor entered into a municipal contract. Performance and payment bonds for the project listed the general contractor as the “Contractor” and the municipality as the “Owner” and obligee. The bond required that bond enforcement actions had to be brought prior to “the expiration of one year following the date on which Contractor ceased work.” In addition, the payment bond prohibited suits against the surety “nless claimant, other than one having a direct contract with the Contractor, shall have given written notice to any of the following: the Contractor, the Owner or the Surety” within ninety days after the claimant performed the work that was subject to the claim. The general contractor subcontracted-out part of the work to two subcontractors. When the first subcontractor couldn’t perform certain work, it contracted with the other to perform in its place. The second subcontractor sued the first subcontractor and the sureties when the first contractor failed to pay, alleging, among other things, that it was an intended third-party beneficiary under the surety agreement. The sureties responded by asserting that the subcontractor’s claims were barred by the bond’s terms and because the subcontractor failed to comply with the bond terms or with New Jersey’s Bond Act. The Bond Act requires “[a]ny person who may be a beneficiary of [a] payment bond, and who does not have a direct contract with the contractor furnishing the bond *** shall, prior to commencing any work, provide written notice to the contractor *** that said person is a beneficiary of the bond.”

The lower court dismissed the second subcontractor’s complaint, finding non-compliance with the Bond Act because the second contractor never gave written notice of non-payment to the “Contractor” – who in this case was the general contractor – before starting work. Consequently, the Court ruled that the second subcontractor had no claim under the bond.

The Appellate Division affirmed, holding that the lower court properly applied the statutory notice standards under the Bond Act. It added that the second contractor also failed to comply with the express terms of the payment bonds themselves. Both the bond and the Bond Act required notice to be given to the Contractor under the bond. According to the Court, the legislative purpose of the notice provision is “to clearly define the risk assumed by the surety issuing the bond *** by identifying potential claimants and beneficiaries in a uniform and organized fashion.” The Court distinguished between “first-tier” subcontractors, who have direct contracts with the general contractor for the work in question, and “second-tier” contractors, who lack a direct contract with the general contractor pertaining to the subject work. Because the contractor’s agreement with the second subcontractor did not relate to the work in question, the second contractor was held to be a second-tier subcontractor. Thus, the Court found that: (a) the work in question was undertaken by the second subcontractor pursuant to a contract with the first contractor; (b) the contractor was not a party to that agreement; and (c) it was irrelevant that the second contractor was performing other work at the site under a separate direct contract with the contractor because the work described in that contract did not pertain to the work performed by the first contractor. Finally, the Court noted that the second subcontractor did not sue the sureties until more than one year after the work had been completed. This was beyond the one year time limitation set forth in both the payment bonds and the Bond Act itself.


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