NJ Water Environment Association
Dealing with Contract Claims
John Napolitano & William “Mickey” Conway
Johnson & Conway, LLP
September 12, 2011
Agenda
1. Basics
2. Types of Claims
1.Claims by Contractor or Vendor
2.Claims by Owner
3.Claim Avoidance
4.Lien and Bond Claims
3. Litigation of Claims
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What is…
A Contract
Typical Contract
• An agreement between two or more
persons
• Professional Services Contracts
include agreements with Accountants,
Engineers, Architects and Attorneys
•Creates an obligation to do or not to do
a particular thing.
•Essentials
• Competent parties & subject
matter
• A legal consideration mutuality of
agreement and mutuality of
obligations
A Claim
• To demand as one’s own or as one’s
right; to urge; to insist; cause of action;
demand for property or money
• Procurement Contracts include
agreements for the purchase of
equipment, chemicals, supplies, etc.
• Service Contracts include agreements
for maintenance, laboratory services
• Construction Contracts include
agreements for improvements to real
property, including installation and repair
of pipelines and physical plant
improvements
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Typical Documents Required
•Bid Bond, as required by N.J.S.A. 40A:1121; 10% of bid amount, not to exceed
$20,000.00
• Consent of Surety, pursuant to N.J.S.A.
40A:11-22; required for all improvements to
real property in excess of $100,000 an
unconditional guarantee to provide the
required performance and payment bonds
(Construction Contracts)
• Statement of Ownership, pursuant to
N.J.S.A. 52:25-24.2
•Subcontractor Identification Form,
pursuant to N.J.S.A. 40A:11-16 (Construction
Contracts)
• Bidders’ Acknowledgment of Revisions
or Addenda N.J.S.A. 40A:11-23(a)
•Business Registration as required by
N.J.S.A. 52:32-44
•Public Contractor’s Registration Form
N.J.S.A. 34:11-56.51 (Construction Contracts)
• Prevailing Wage Compliance Declaration
N.J.S.A. 34:11-56.25 et seq.
•Equipment Certification as required by
N.J.S.A. 40A:11-20 (Construction Contracts)
•Non-Collusion Affidavit as required by
N.J.S.A. 52:34-15
•Bidder’s Corporation Resolution,
evidence of the Authority to bind the bidder
where bidder is a corporation or a partnership
•Bidder’s Checklist for Mandatory
requirements N.J.S.A. 40A:11-23.2
•Bidder’s Qualification Form, which is a
series of questions regarding the bidder’s
history and previous experience
•Americans with Disabilities Act, 42 U.S.C.
§ 12101
•Affirmative Action - No Discrimination,
N.J.A.C 17.27-5.2
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Typical Contract Terms
•Types of Payments
• Lump sum - contract is awarded
based upon a single price
•Scope of Work: a general description
of the work that is anticipated to be
performed under the contract or the
goods to be supplied.
• Unit Price - provides for payment
• Integration of Contract Documents:
based upon individual increments
most contracts provide that the contract
of work
documents include the contract general
• Allowances - contract provides
conditions, the drawings and the
each bidder with a specific dollar specifications.
amount for work that cannot be
• Subcontracts: most contracts provide
adequately specified
that the contractor agrees to bind each
• Alternatives - additional or
subcontractor to the terms of the general
optional work that the owner may construction contract.
want done; usually dependent
• Permits: This sets forth who is
upon price
responsible for getting the permits for
• Time of Completion: N.J.S.A.
construction and who pays permit fees.
40A:11-17 requires that the amount of
working days for each contract be
specified.
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Typical Contract Terms cont.
•Suspension of Work, no damage for
delay provisions: N.J.S.A. 40A:11-11
provides that to limit a contractor’s
remedy for the contracting unit’s
negligence, bad faith, active interference,
tortuous conduct or other reasons
uncontemplated by the parties that delay
the contractor’s performance to give a
contractor an extension of time for
performance under the contract is void
under public policy. However, the
provision can be drafted such to limit the
contractor’s right to additional
compensation to actions by the
contracting unit and not third parties.
•Liquidated Damages: A contract may
provide for a daily damage amount for a
contractor’s failing to complete the
project on time. Liquidated damages are
normally used when actual damages
would be difficult to quantify and must
bear a rational relation to what
anticipated damages could be on the
project. Extremely high liquidated
damage provisions may be invalidated if
a court determines that they constitute a
penalty. N.J.S.A. 40A:11-11.
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Typical Contract Terms cont.
•Prevailing Wages: A contract for
construction, reconstruction, demolition,
alteration and maintenance work shall
provide that all contracts in excess of
$2,000 in a case of an Authority and
$10,750 in the case of a municipality
shall require the contracting unit to pay
prevailing wages for all contracts for
work defined in N.J.S.A. 34:11-56.25
and require that certified payroll records
be submitted to the contracting units for
each employee on the project.
•Indemnity Provisions. Most contracts
provide to the greatest extent allowable
by law the contractor shall hold harmless
and indemnify the owner, its employees
and engineers for any and all claims that
arise out of the contractor’s
performance of the contract, including
attorney’s fees and cost of suit.
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Typical Contract Terms cont.
Termination Provisions
Termination for Default: contracts will provide for a termination of the contractor
for his material failure to properly follow the contract specifications, violation of
laws, failure to make adequate progress, general poor performance and
bankruptcy of the contractor. These termination provisions must be carefully
drafted and followed, including any and all notice provisions required. Generally,
the termination provision will provide adequate notice be given to the contractor
and a time for the contractor to cure his default.
Termination for Convenience: this provision provides that an owner may
terminate the contract for reasons other than the default of the contractor.
Generally, it will provide that in the event the owner terminates the contract for its
convenience, the owner is responsible to pay the contractor for all of the work the
contractor has performed to date, including reasonable costs of termination. The
AIA documents also allow for the contractor to be paid for his anticipated profits of
the work not performed.
Termination by Contractor: generally, the contract will allow a contractor to
terminate its agreement with the owner in the event the owner’s failure to make
timely payments in accordance with the contract provisions. Again, there is
normally a notice provision which will allow the owner to cure any default.
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Typical Contract Terms cont.
• Application for Payments
•Changes to Work Provisions: a
contract shall provide for changes in the
• Payment for stored materials:
work which were not originally
as provided for in N.J.S.A.
contemplated in the original design
40A:11-16.4
and/or scope of work. These provisions
• Retainage - N.J.S.A. 40A:11normally provide that the contractor
16.1 limits retainage to two
submit a price, either lump sum or unit,
percent (2%) for contracts in
for the changes in the work. The best
excess of $100,000.
practice would be that these changes be
• Final Estimate Payments approved as to scope and price prior to
provides for the release of
the work beginning and an executed
retainage, all documents that
change order be issued. In cases where
need to be provided including
a price cannot be agreed to, many
warranties, release of liens from
contracts provide that the owner may
contractor and subcontractors.
direct the contractor to perform work on
a time and materials basis.
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Typical Contract Terms cont.
•Liens: provision addresses the times
when a subcontractor or material man
may file a lien against the project funds.
•Maintenance Bond, supplying of a
maintenance bond up to two years in
accordance with N.J.S.A. 40A:11-22.
• No Waiver Provision - a general
provision that provides that in the event
the owner does not enforce a specific
provision during the course of the
contract term, it does not waive
enforcement of the provision in the future
• Alternate Dispute Resolution Pursuant to N.J.S.A. 40A:11-50 all
construction contracts must include an
ADR provision as a prerequisite to filing
a lawsuit. This provision does not apply
to bid protests.
• No Oral Agreement Provision - the
contract may only be modified by a
writing executed by all parties.
• Insurance Provisions - Provides the
types and amounts required for the
contractor to provide. Usually requires
the owner, employees and consultants
list as additional insured on the policy.
These provisions should be reviewed by
the owner’s insurance consultant to
determine if the policies as specified are
generally available in the market place to
contractors.
• Warranty/Maintenance Period Typically contractor warrants that its
work is in conformance with the
specifications and drawings and agrees
to repair any defective work for a period
of one year.
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Bid Challenges – The Initial Claim cont
Type 1 – Challenge to bid award
The law requires that a publicly bid
contract be awarded to the lowest
responsive and responsible bidder or
vendor. Challenger alleges that it is
the lowest responsive and responsible
bidder.
A bid challenge to the award must be
based upon a material aspect of the
bid. The most common challenges
refer to the failure of the low bidder to
submit the proper paperwork with its
bid.
The typical nonwaivable defects are:
•Failure to
• submit a consent of surety.
• submit an equipment list.
• enclose business
registration certificate.
• enclose subcontractors
identification form pursuant
to N.J.S.A. 40A:11-16,
statement of ownership
pursuant to N.J.S.A 52:2524.2, bid bond as required by
N.J.S. A. 40A:11-21.
•Ownership Disclosure
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Bid Challenges – The Initial Claim cont
Type 2 – Challenge to Specification
When a bidder or supplier at least three days prior to the bid opening file a
challenge to the specification usually alleging the specification unfairly favor
a particular contractor or product. A successful challenge will result in a
rebid with revised bid documents.
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Claims by Contractors or Venders
In order for a contract claim for additional compensation to be valid, the contractor
must prove both entitlement and actual damage. To show entitlement, the contractor
must show that claim resulted from events or situations not the fault of the contractor
and measurable additional expense.
1. Extra Work – The simplest claim for additional compensation usually
arises when contractor alleges it was required to perform work or supply items that
were not set forth in the bid documents
2 .Differing Site Conditions - The contractor alleges the situation it
encountered in the field was different from that which was indicated in the bid
documents and as a result it incurred additional expense.
3. Delay Claim – The contractor alleges the project has taken longer than
scheduled and as a result it incurred additional costs
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Claims by Contractors or Venders cont
4. Weather Delays – The contractor alleges as a result of unusually severe
weather the project completion was delayed or its productivity was reduced causing
additional expense.
5. Time Extensions – A request for additional time to complete the project it
may or not include a request for additional compensation
6. Municipal Mechanics Lien – A claim by the general contractor or
subcontractor for money it earned but was not paid. It places a lien on the contract
funds in the possession of the owner.
7. Prompt Payment Claim – A claim by a contractor that owner failed to
make payment in a timely manner as required by statute. The law entitles the
contractor interest on those payment not made timely.
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Claims by Owners
1. Liquidated Damages – A per diem amount as set forth in the contract the
owner is entitled to from the contractor for each day the contractor is late in
completion of the work. Delay in completion must be the fault of the contractor.
2. Warranty Claim – A claim by the owner, as provided for by agreement, to
have a contractor or manufacturer repair defective or broken work. Owner does not
have to prove fault. It occurs after the project is completed and accepted and within
the warranty period.
3. Defective Work – A claim by the owner that the contractor did not
construct or supply work in accordance with the bid documents. The owner must
prove the contractor was at fault.
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Claims Avoidance
1. Contract Documents – Proper planning, investigation and review of the
contract documents will limit claim; spend the time and effort to develop a complete
set of contract documents.
2. Schedule – Establish a rational project schedule for the project
completion; tract the contractor submitted schedule and modify as necessary during
construction. This will allow the owner to determine whether any delays are the result
of contractor or owner actions.
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Lien & Bond Claims
1. Liens on Public Jobs (2A:44-126)
a. Who can file: GCs, Subs and second tier subs and suppliers.
b. Lien rights for certain public improvement projects are governed by the
Municipal Mechanic's Lien Law (2A:44-126). Only certain public projects in New
Jersey can be liened, those considered to be “municipal” projects: where the owner
is a county, city, town, public commission, public board or municipality. Projects
owned by the State and its subdivisions are not lienable. N.J.S.A.2A:44-126.
c. To preserve the right to file a lien on a Municipal job the contractor or
supplier must file a notice within 20 days of the first performance of the work or
delivery of materials. The notice must be filed with the municipal clerk, or appropriate
official (depending on the owner.) N.J.S.A. 2A:44-128.
d. State and state subdivision jobs- no lien rights.
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Lien & Bond Claims cont
2. Bond Claims by Subs and
Material men- Prior to commencing
work or delivering materials, a subsub-contractor or supplier who may
be beneficiary on a bond must prefile a notice to preserve its right to
make a claim against a payment
bond on a public job. Prior to
delivery of materials notice must be
filed with the Contractor by certified
mail that Doka is a beneficiary under
the bond. N.J.S.A. 2A:44-145. As
owners, not so concerned about this
b/c they are claims against the bond.
3 . Default- Performance Bond
Claims Work: where contractor is in
material default exercise rights under
Performance bond to have bonding
company complete the project
a) What is material defaultcontractor terminates performance
without justification; material
deviation from schedule; failure to
make payments to subs; uncorrected
problems with the work; bankruptcy
insolvency of contractor
b) How to Proceed- after cure period
expires, notify bonding company and
require Bonding Co to Perform;
bonding company steps in shoes of
contractor.
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Litigation of Claims
1. Litigation v. Arbitration
1. Contract Arbitration/Agreed Upon Arbitration
2. Pros and Cons- Arbitration less discovery, fewer depositions and motions, etc.
Also may get to Arbitration date faster; Litigation- easier to schedule (attorneys
have to abide by court mandates vs consent scheduling in arbitrations); Cost
paying for arbitrators
2. Litigation Procedure- Timing- process
1. Bid issues and other construction claims often commenced with an Order To
Show Cause- abbreviated litigation schedule
2. Complaint- standard mode of commencing case; Answer due in 35 days, other
parties can be brought in
3. Discovery- process by which information is exchanged between parties.
1. Interrogatories are written questions, must be answered
2. Document demands call for exchange of documentation related to claims
and defenses
3. Depositions- question and answers between attorneys and key witnesses
4. Expert reports and depositions- key to most construction cases are
experts
4. Motions- discovery issues; summary judgment; motions in limine
5. Trial- timing, witnesses, jury/non-jury
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Litigation of Claims cont
3. Preparation for litigation of Claims
1. Record keeping- organization of all job records including emails, meeting
minutes, correspondence, requisitions, invoices, delivery slips, etc. Key
because this is how the case is won and lost; when potential claims ariseattorneys should be involved in creating and preserving paper trail
2. Spoliation Issues- under NJ law, must be careful correcting defective work
without notice to the defaulting contractor. Must provide an opportunity to
correct and then, if not correct, provide opportunity to observe, photograph and
document existing conditions prior to demolition, correction or covering up
same
3. Experts- if not using own professionals consider claims or other expert prior to
litigation (during job if large potential claim exists)
4. Indemnity Clauses- often determines who pays for litigation and who defends.
Different types of clauses (indemnify and/or defend, option of owner, etc) dictate
terms.
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Litigation of Claims cont
5. Settlement Agreements- 95% of all cases settle. Some important terms to include
in settlement agreements:
1. If work is contemplated in settlement agreement, it is essentially a new
contract. Need scope and all protective clauses or refer to existing terms of
contract. If extra payments for work, make sure within contract/LPCL
threshold. If Bonding company is taking over work or finishing, avoid
documents that release BC or its contractors from liability.
2. If payments from any party to owner or from GC to subs, include default
provision in case payments are not made. Default should include automatic
judgment, attorney’s fees and costs and interest and escalated settlement
amount. Also look for personal guarantees in the event of payment.
3. Look to recover costs incurred to owner through existing contract provisions
4. Reason for settlement- juries unpredictable; avoid precedential bad decisions,
very expensive, staff time, also at times jobs are ongoing so settlement helps
get jobs completed which is key objective
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