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Labov Mechanical, Inc. v. East Coast Power, L.L.C.

377 N.J. Super. 240, 872 A.2d 142 (App. Div. 2005)

CONTRACTORS; CONSTRUCTION LIENS — Under the New Jersey Construction Lien Law, a property owner may only reduce the lien fund by payments it has made to the contractor for work performed under the contract.

A power company entered into a written agreement with a general contractor to perform work at a energy operation project. The general contractor subsequently entered into an agreement with two subcontractors to perform some of the project work. Due to cash flow problems, the general contractor was unable to complete the work by the contractual completion date. As a result, it negotiated a liquidated damages clause with the power company. The clause provided that the general contractor would pay the power company a fixed amount for liquidated damages. The subcontractors then filed lien claims against the power company for unpaid work under the prime contract between the general contractor and the power company. The power company advised the subcontractors that it would deduct the liquidated damages that it was owed from the general contractor from the lien fund. The subcontractors then filed an action against the company seeking a pro rata distribution of the full amount due under the prime contract. They asserted that the power company should not be able to deduct the liquidated damages from the lien fund, contending that the lien fund should equal the full amount due to the general contractor under the prime contract. The lower court granted summary judgment for the subcontractors, rejecting the power company’s contention that it could reduce the lien fund by the liquidated damages it was owed by the general contractor. The power company appealed.

The Appellate Division affirmed the lower court’s ruling. In reaching its decision, it discussed the New Jersey Construction Lien Law (CLL). The CLL was designed to guarantee security for contractors and suppliers who furnish labor and materials used to enhance the value of the property of others. It permits any contractor, subcontractor or supplier who has provided work, services, materials or equipment to be entitled to a lien for the value of work performed or materials and equipment furnished based on the contract price. Therefore, the amount of the lien fund is based on the contract price. The Court found that, under the CLL, a property owner may only reduce the lien fund by payments it has made to the contractor for work performed under the contract. As a result, it held that the company could not offset the liquidated damages against the lien fund contract.

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