NEW JERSEY'S PROMPT PAYMENT LAW
By: John F. Neary, Esq.

On September 1, 2006, New Jersey's Prompt Payment Law (PPL), N.J.S.A. 2A:30A-1 & 2, went into effect. It applies to all construction contracts entered into after that date; it established time constraints for payment of agreed-upon invoices on both public and private construction projects; and extends down the construction chain from the prime contractor to a second-tier subcontractor or supplier.¹ When an earned and owed payment is not timely paid, interest accrues and, under certain circumstances, the unpaid payee has the right to suspend its work pending receipt of the tardy payment. The billing of an unapproved change-order request would not be covered by the PPL.²

Except as herein indicated, the PPL applies to all contracts for "improvements" to real property regardless of the amount, ownership or use. The term "improvements" includes: (a) building, altering, repairing, or demolishing any structure upon, connected with, on or beneath the surface of real property;³ (b) excavating, clearing, grading, filling, or landscaping any real property; (c) construction of driveways and private roadways on real property; (d) the furnishing of construction-related materials for any of the above purposes, including trees and shrubbery; and (e) performing any labor upon a structure, including architectural, engineering and surveying. N.J.S.A. 2A:30A-1.

The following payment procedure is applicable to construction projects other than a public project on which the governing body's payment approval is required:

1. If the prime contractor has properly performed the invoiced work; and
2. If the owner or the owner's "authorized approving agent" has approved and certified the prime contractor's invoice for such properly performed work or if, 20 calendar days after its receipt of such a bill, the owner fails to issue a written Payment Withholding Notice (PWN) stating the basis for a non-payment;
3. The owner must pay the prime contractor's invoice within 30 calendar days of the contractually specified billing date. ⁴

N.J.S.A. 2A:30A-2(a). Where governing-body approval is required for such payments, the aforesaid 20-day default approval period is not triggered until the public meeting following 20 calendar days of the billing date. At that time, the bill must be either approved or a written PWN must be provided to the payee. If the bill is approved, it must be paid in the next payment cycle. Id. This alternate payment procedure must be defined in the public body's bid specifications and contract in order to have effect. Id.

If the work or materials of a first or second tier subcontractor/supplier has been properly performed and has been "accepted" by the owner and the parties have not otherwise agreed in writing, the prime contractor shall pay such subcontractor/supplier and it, in turn, shall pay its subcontractor/supplier, within 10 calendar days of receipt of payment, the "full amount" the payor has received for the payee's work. However, in the case where a subcontractor/supplier has ongoing project work, the amount owed shall only be payable if the subcontractor/ supplier has properly performed. N.J.S.A. 2A:30A-2(b). (This protection existed under the predecessor statute, which bore the same citation as the PPL and protected only subcontractors.)

The PPL provides that prime construction contracts and first and second tier subcontracts/purchase orders entered into after September 1, 2006 shall have a provision that payment disputes thereunder may be submitted in accordance with an alternate dispute procedure (ADR). N.J.S.A. 2A:30A-2(f). Although it is unclear as to whether both parties must agree to such an ADR submission, the analogous ADR requirement of the Local Public Contracts Law (LPCL) allows for the invocation of ADR by either party. See N.J.S.A. 40A:11-50. It is likely that the PPL will be similarly construed.

The PPL contains the following two enforcement mechanisms:

(1) The unpaid protected payee may charge interest, at the prime rate (i.e. base rate on corporate loans at large U.S. money center commercial banks⁵ ) plus one percent, when an earned and approved bill is not timely paid, N.J.S.A. 2A:30A-2(c) ; and

(2) The unpaid protected payee, after giving seven (7) days written notice, may suspend its work without penalty provided: (a) a PPL required payment was not made; (b) the protected payee was not provided a written PWN;⁶ and (c) the payor is not engaged in a good faith effort to resolve the reason for withholding payment, N.J.S.A. 2A:30A-2(d).

In order to avoid a work suspension, the payor should be careful to issue a PWN and proceed in good faith to try to resolve the obstacle to making payment. Exempt from the PPL's enforcement provisions are federally funded transportation projects, as defined in N.J.S.A. 27:1B-3, if application of such provisions would jeopardize funding due to the owner failing to meet federal standards for financial management systems, as outlined in 49 C.F.R. 18.20. N.J.S.A. 2A:30A-2(c) & (d).

The rights, remedies or protections provided by the PPL are in addition to those provided pursuant to any other provisions of State law. N.J.S.A. 2A:30A-2(e)(1). To the extent that the PPL provides greater rights, remedies and protections, the PPL shall supersede such other provisions. Id. The venue for any civil action brought to collect payments shall be within the State of New Jersey, N.J.S.A. 2A:30A-2(e)(2), and the prevailing party shall be awarded costs and attorney's fees, N.J.S.A. 2A:30A-2(f). Neither this venue requirement nor the right to attorney's fees applies to an ADR proceeding, which may tend to promote litigation of claims under the PPL. This problem could be resolved by providing for the recovery of counsel fees in the ADR provision in the contract.

The PPL, like its predecessor, is incorporated into other procurement statutes pertaining to State construction contracts [N.J.S.A. 52:18A-78.11(b)(3) (N.J. Building Authority) and N.J.S.A. 52:32-2(c)] and contracts entered into under the Public Schools Contracts Law [(N.J.S.A. 18A:18A-18(c)].

The PPL ought not to be confused with New Jersey's Prompt Payment Act (PPA), N.J.S.A. 52:32-32, et seq., which requires payment by a State agency within 60 calendar days of the contractually specified date or, if no required payment date is specified, 60 calendar days from the receipt of a properly executed State invoice or 60 calendar days from the State's receipt of goods or services, whichever is later. N.J.S.A. 52:32-34. The interest rate under the PPA is the rate specified by the State Treasurer by the 30th day after the end of each fiscal year. N.J.S.A. 52:32-35(a). The State is required to notify the vendor within 30 calendar days of any defect or impropriety in any invoice or goods or services which would prevent the running of the 60-day payment period. N.J.S.A. 52:32-36. The State Treasurer could waive interest determined to have resulted from delinquencies beyond the State's control. N.J.S.A. 52:32-37.

First-tier subcontractors and suppliers on State projects previously enjoyed the protections of the PPA which, pursuant to, N.J.S.A. 52:32-41, provides that: (1) prior to issuance of a progress payment to a prime contractor by a State agency, the prime contractor must certify that its subcontractors or suppliers have been paid the amount due from any previous progress payment and shall be paid any amount due from the current progress payment and that there exists a valid basis, under a subcontractor's or supplier's contract, to withhold payment and, therefore, payment is being withheld; (2) if the prime contractor withholds payment from a subcontractor or supplier, it shall provide to such subcontractor or supplier a written PWN providing a detailed explanation for the withholding; (3) a copy of this PWN must be sent to the owner and the prime contractor's payment-bond surety; and (4) if the subcontractor or supplier is not paid within 10 calendar days after receipt by the prime contractor of payment by the owner for the billed work and no valid basis exists for the payment withholding, the subcontractor or supplier shall be entitled to the sum wrongfully withheld, plus interest at the prime rate plus one percent and court costs. If, however, payment is determined to have been validly withheld, the prime contractor shall be entitled to his court costs.

¹ The terms "subcontractor" and "subsubcontractor" are defined so as to include one who has furnished materials. N.J.S.A. 2A:30A-1.
² The term "billing" is defined so as to include a "written approved change order," N.J.S.A. 2A:30A-1, implying that a billing for an unapproved change order is not encompassed by the PPL. Also, this term requires that the payment request be "in accordance with the terms and definitions of the applicable contract," and, generally, construction contracts do not permit an "extra" to be billed unless a written change order has been issued amending the contract to include the extra.
³ The term "real property" is defined as "real estate improved upon or to be improved upon." N.J.S.A. 2A:30A-1.
⁴ The "billing date," as used in the PPL, means the contractually specified billing date. N.J.S.A. 2A:30A-1 (The LPCL requires monthly payment for construction projects in excess of $100,000. N.J.S.A. 40A:11-16.2).
⁵ See http://www.bankrate.com/brm/ratewatch/wsj/PrimeRate.asp
⁶ The PPL does not specify a time limitation for the PWN notice to a protected subcontractor/supplier. In fact, unlike owners, prime contractors and subcontractors are not required to provide a PWN, except in order to avoid a possible work suspension.


The purpose of this alert is to inform our clients and friends of recent developments in the law. It is not intended nor should it be used as a substitute for specific legal advice or opinions, as legal counsel may only be given in response to inquiries regarding particular factual situations.

John F. Neary is Of Counsel at the firm's Rochelle Park office and is a lead attorney in the firm's Construction and Public Contracting Group.

John has more than 30 years of legal experience in the construction field. He has worked extensively with clients concerning construction and surety law, construction disputes, bid protests, construction litigation, commercial litigation and appellate matters.

Prior to joining Florio Perrucci Steinhardt & Fader in May 2006, John was most recently a solo practitioner in Roseland, N.J., after having been a partner at Connell Foley, also in Roseland. While at Connell Foley for about 25 years and thereafter in his solo practice, he was dedicated to construction-related matters including drafting contracts and other documents; advising clients on disputes and claims, including those against sureties; representing clients regarding potential claims, claims and litigation; and representing clients with bid protests and bidding-related issues on public works projects including litigated bid protests.

A native of Essex County, John holds an undergraduate degree and a Juris Doctor degree from Seton Hall University. While in law school, he was the Case Notes Editor for the Seton Hall Law Review. Immediately following law school, he was an associate with the firm of John B.M. Frohling, Esq., practicing in the areas of commercial and securities litigation law.

John is a member of the American, New Jersey and Essex County Bar Associations. He is admitted to practice in the New Jersey and U.S. District Court, District of New Jersey; the U.S. Court of Appeals, Third Circuit; U.S. Claims Court, and U.S. Supreme Court.