The Thomas Group, Inc. v. Wharton Senior Citizen Housing, Inc.

163 N.J. 507, 750 A.2d 743 (2000)
  • Opinion Date: May 4, 2000

CONSTRUCTION; LIENS—Where a contractor has performed substantially all of its work, the prerequisites that a contractor has performed its work under the contract and that the monies be “due and owing” before it is entitled to a construction lien are not to be interpreted literally.

A general contractor and designer/builder entered into a construction contract for the benefit of a property owner. The contractor submitted an application for final payment and on the same day filed a construction lien pursuant to the Construction Lien Law. About a month later, the contractor filed a complaint to foreclose upon the construction lien, naming the owner as defendant. The lower court, with the affirmance of the Appellate Division, held that the contractor’s lien claim was filed prematurely because the contractor had not completed the work represented by the value of the lien “in accordance with the contract” as required by N.J.S. 2A:44A-3. Each court observed that the contractor’s entitlement to retainage was governed by the terms of the contract, but that the contractor had not complied with all the contractual prerequisites to release of the retainage. Neither the final payment nor the retainage amount became due until the contractor submitted an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the work had been paid or otherwise satisfied. In addition, the contractor was required to supply a Consent of Surety, a certificate showing that certain insurance remained in force following completion of the work, and evidence of payment to subcontractors or lien waivers. By its own admission, the contractor had not submitted the Affidavit of Indebtedness, Consent of Surety, Certificate of Insurance or Release of Liens from Subcontractors. In addition, there remained a 55-page punch list describing numerous repairs and corrections to be made to the project. The lower court found that it was undisputed that the contractor had performed the majority of the work and that it had not “willfully overstated” the amount of the lien claim. The Appellate Division, in its affirmance, noted that “the ability to file a construction lien is directly related to the terms of the contract.” According to the Supreme Court, “[m]easured by that standard, the Appellate Division found that [the contractor’s] lien claim was premature.” In this, the first Construction Lien Law case heard by the New Jersey Supreme Court, the Court reversed, holding that a contractor does not have to risk losing its statutory lien by waiting until all of the preconditions of payment were satisfied before asserting its lien. The Court ruled that “an owner can adequately be protected by staying the contractor’s right to enforce its lien until the contractual preconditions to payment are met. In conjunction with such a stay application, the trial court should fix a reasonable schedule for the contractor to complete the preconditions of payment. The owner is entitled to a prompt resolution of competing claims.” In reaching this conclusion, the Court noted that there were no provisions in the Construction Lien Law addressing the interaction between that statute and contractual retainage clauses. Nor did the Court find any published opinions involving that interplay. In an effort to give the Law a reading that would be sensible and consistent with the Law’s overall intent to permit a contractor to file liens to protect the value of the work provided, the Court rejected the owner’s argument that allowing the contractor to file a lien would obviate the important retainage provisions within the construction contract because the purpose of such retainage provisions is to defer final payment until the payment conditions of the contract are fulfilled. Essentially, the owner claimed that under the lien law, a claimant was required to certify the amount claimed as “due and owing” at the time of filing and that this meant that because the contractor did not comply with all the terms of the contract, the monies were not “due and owing.” The point at issue was that “[t]he statute provides that any contractor ... who provides work, services ... pursuant to a contract shall be entitled to a lien for the value of the work or services performed, ... in accordance with the contract ... .” In essence, the owner was arguing that the contractor had not provided services “in accordance with the contract” because it had not delivered items that were prerequisite to final payment. The Court, however, interpreted that language “to mean that a party must perform work under a contract to be entitled to a lien, but not to require literally that a party must satisfy all of the terms and conditions of a contract before it can file a lien.” In its view, to interpret the phrase “in accordance with the contract” otherwise, would frustrate the primary objective of the legislation. Another troublesome phrase was the requirement that the amount claimed be “due and owing.” That phrase is not defined in the statute and the legislative history was not helpful to the Court. Consequently, the Court looked at the public policy involved and decided that there were two competing interests, both worthy of protection. First, a contractor who has performed substantially all of its work is entitled to seek protection of its statutory lien claim. On the other hand, an owner should not be compelled to pay its contractor until all of the bargained-for prerequisites for payment are satisfied. The Court, in its ruling, aimed to fashion protections for both interests within the four corners of the statutory scheme.