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O.A. Peterson Construction Co., Inc. v. Englewood Hospital and Medical Center

A-1536-08T1 (N.J. Super. App. Div. 2010) (Unpublished)

CONTRACTORS; SUBCONTRACTORS — A court will uphold a provision wherein a contractor is not obligated to pay a subcontractor if the contractor does not receive funds from its customer specifically designated to be given to the subcontractor, but the contractor must observe the covenant of good faith and fair dealing if it is going to unilaterally waive the subcontractor’s right to be paid for its work by the customer.

A general contractor that entered into a construction contract with a hospital hired a subcontractor for specialized work on the project. Their hiring agreement said the general contractor would have no liability to pay the subcontractor for services if it did not receive funds from the hospital specifically designated to be given to the subcontractor. When the hospital stopped making payments, litigation began between the hospital and general contractor. It resulted in a monetary settlement.

The general contractor and its subcontractor contested, in court, the amounts due for services under their agreement. The general contractor asserted that its settlement agreement with the hospital did not specifically designate how much of the settlement was attributable to work performed by the subcontractor, and, as a result, under their agreement, it owed the subcontractor nothing. The lower court found that the general contractor did not deny receiving payment from the hospital, but that it delayed payment to the subcontractor when a construction lien was filed based on the general contractor’s allegation that the subcontractor had abandoned its duties. The general contractor still did not pay even after the construction lien was removed. The lower court awarded $19,000 to the subcontractor, and both parties appealed.

The Appellate Division affirmed, finding that the agreement clause unambiguously shifted the risk of non-payment to the subcontractor; if the owner refused to pay for the subcontractor’s work, the general contractor was not obligated to pay that subcontractor until the dispute was resolved and the owner made payment. However, the Court observed the clause did not come into play as the record reflected that the general contractor had received payment from the hospital for the subcontractor’s work. Further, the Court held that the covenant of good faith and fair dealing precluded the general contractor from unilaterally waiving the subcontractor’s right to be paid for its work in its settlement with the hospital. That duty required the general contractor, in its settlement agreement with the hospital, to designate a portion of settlement funds for rightful work performed by the subcontractor. As a result, the general contractor could not rely on its hiring agreement to defeat the subcontractor’s claim for payment of services rendered.

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