Construction Law Signal

Construction Law Signal

Insights & Information on Current & Emerging Developments affecting the Construction Industry

Shafer Electric & Construction v. Mantia: PA Supreme Court holds that noncompliance with the Home Improvement Consumer Protection Act does not entitle homeowners to free work

Posted in Consumer Protection, Contract, Home Improvement, Pennsylvania

Pennsylvania’s Home Improvement Consumer Protection Act (“HICPA”), which went into effect in 2009, generally requires that home improvement contracts be in writing and contain thirteen specific items (including the contractor’s home improvement contractor registration number, the date of the transaction and the name, address and telephone number of the contractor).  Absent inclusion of all items, the contract is not valid or enforceable against the owner.  This means that the contractor cannot assert a claim for breach of contract if the owner fails to pay for work performed.

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However, in the recent case of Shafer Electric & Construction v. Mantia, the Pennsylvania Supreme Court ruled that even if a contract fails to comply with HICPA, the contractor may still be able to recover the reasonable value for its services under the equitable theory of quantum meruit, or unjust enrichment.  What this means is that a homeowner is not excused from its obligation to pay the contractor simply because the home improvement contract does not comply with HICPA.

In Shafer, the homeowners engaged the contractor to build a garage addition onto their home.  The contract, however, did not comply with most of the requirements of HICPA.  After the contractor had performed work, a dispute arose and the parties agreed that the contractor would 1) invoice the homeowners for the work completed and 2) thereafter, discontinue its efforts.  Nevertheless, the homeowners refused to pay and the contractor filed suit for breach of contract and quantum meruit.  The homeowners moved to dismiss the action pursuant to HICPA.  The trial court granted the motion.  On appeal, the Pennsylvania Superior Court reversed as to the quantum meruit claim.  The homeowners then took a further appeal to the Pennsylvania Supreme Court.

The Supreme Court determined that HICPA does not preclude a non-compliant contractor from pursuing an action in quantum meruit.  Instead, HICPA only speaks to the enforceability and validity of home improvement contracts.  Further, under common law principles, a party is not precluded from bringing a quantum meruit action when one for breach of contract is unavailable.  Significantly, the court noted that the language of HICPA does not make any reference to a claim for quantum meruit being precluded and that it would be improper to insert words into HICPA that would extinguish a claim for quantum meruit.

Shafer is helpful for contractors in the event of noncompliance with HICPA.  However, it remains our strong recommendation to contractors that your home improvement contracts comply with HICPA.  Under quantum meruit, you can only recover the reasonable value of the services rendered and not necessarily the profit under the contract.  Additionally, a violation of any aspect of HICPA is also considered a violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, which could subject you to enhanced damages and attorney’s fees in the event that a homeowner asserts a claim against you.

If you are unsure about whether your home improvement contract complies with HICPA, please do not hesitate to contact us.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate. 

Matthew L. Erlanger is an Associate in the Construction Group.

Update on Discoverability of Attorney-Expert Communications

Posted in Jennifer Horn, Matthew Erlanger, Pennsylvania

On April 29, 2014 an evenly divided Pennsylvania Supreme Court in Barrick v. Holy Spirit Hospital upheld a lower court ruling holding that communications between a party’s attorney and a party’s expert witness are exempt from disclosure during discovery.  This case was previously discussed in “Pennsylvania Supreme Court Evenly Divided on Discoverability of Attorney-Expert Communications“. In that blog post we noted that there was a proposed amendment to Pennsylvania Rule of Civil Procedure 4003.5 that would afford absolute protection from disclosure to attorney-expert communications and that it would be interesting to see what effect the order of the divided court would have on the proposed amendment.

File Protection

On July 10, 2014, the Supreme Court addressed the proposed amendment by officially amending Rule 4003.5.  Under new Rule 4003.5(a)(4), which goes into effect on August 9, 2014, a party may not discover the communications between another party’s attorney and any expert.  This is true regardless of whether the expert is expected to testify at trial.  Additionally, a party may not discover draft expert reports and any communications between another party’s attorney and experts relating to such drafts.

Based on the amendment, there is no longer any doubt.  Going forward, in any civil case in the Pennsylvania state courts, communications between an attorney and an expert are not discoverable.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate. 

Matthew L. Erlanger is an Associate in the Construction Group.

Amendments to Ohio P3 Legislation Add Bonding Requirements with a Twist

Posted in Bond, Lisa Wampler, Lori Azzara, Ohio

It is no secret within the construction industry that public-private partnership (P3) project delivery has recently become all the rage.  The demand for infrastructure repairs and improvements is high, and the public dollars needed to fund them are scarce.  P3 projects incorporating public and private funding have, therefore, become a creative delivery alternative that states like Ohio have adopted.  And with new delivery methods comes the need for new legislation to regulate and administer these types of projects.

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The Bonding Requirements

Last month, Ohio Governor John Kasich approved new amendments to the state’s public-private partnership (P3) legislation that could have drastic impacts on subcontractors and suppliers performing work on Ohio P3 projects.  The new law, which goes into effect this September, requires prime contractors to provide both performance and payment bonds on P3 projects in Ohio—a change that subcontractors and suppliers will likely be touting as it will help to secure the payment obligations of prime contractors to their subs.

The Catch

The catch is that the director of the Ohio Department of Transportation (ODOT), Jerry Wray, will have discretion to determine the amount of the bonds.  In other words, the director could fix a bonding amount that is less than the prime contract price, leaving potential bond claimants somewhat exposed to the risk of nonpayment.

The legislation also requires that the performance bond be conditioned on the private entity performing the work according to the agreed upon terms, within the time prescribed, and in conformity with any other terms and conditions that the director requires.  Similarly, the payment bond must be conditioned on the payment for all labor, work performed, and materials furnished in connection with the P3 agreement and any such terms and conditions that director requires.

What Do the Amendments Mean for the Future?

This bonding requirement is a major change to Ohio’s P3 legislation, which is currently silent on bonding.  The new bonding requirement, which gives the director considerable discretion, is markedly different from some of Ohio’s other legislation relating to public construction.   The Ohio Transportation Code, for instance, requires a payment and performance bond for 100% of the contract amount for transportation projects.

Depending on the amount specified by the ODOT director for the payment and performance bonds, starting in September of 2014, contractors farther down the chain on Ohio P3 projects may have little or no payment protection other than directly bringing an action against the contracting party directly upstream.  We will continue to monitor the implementation of the new P3 bonding requirement and how ODOT’s director decides to use his discretion.

Lisa M. Wampler is a Partner in the Construction Group of Cohen Seglias Pallas Greenhall & Furman PC.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Schuylkill Products: Important Lessons and Reminders about the Power of the False Claims Act

Posted in Daniel Fierstein, Federal, Jennifer Horn, Small Business

By: Jennifer M. Horn, Daniel E. Fierstein and Katherine Tohanczyn

As many federal government contractors know, the False Claims Act (FCA) is a tool used by the federal government to deter fraud. Those found to have knowingly submitted false information to the government in violation of the FCA stand to suffer the imposition of fines, forfeiture of improperly obtained proceeds, and, in some instances, incarceration.

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Recently, in the largest reported fraud case involving a disadvantaged business enterprise (DBE) in the country’s history, a Pennsylvania federal judge ruled against a government contractor in a $136 million DBE fraud claim brought by a former employee and whistleblower under the FCA. In that case, Schuylkill Products, Inc. (SPI), a Pennsylvania-based concrete bridge beam manufacturing company, conspired with and used Marikina Construction, Corp. (Marikina) as a “DBE” front to procure millions of dollars of federally funded DBE-designated work.

What Is a DBE Program?

Like many governmental agencies, the U.S. Department of Transportation (DOT) has a DBE program, which attempts to increase the participation of DBEs in state and local procurement. The DOT seeks to accomplish this goal by requiring state and local agencies receiving DOT funds to establish goals and requirements for the participation of DBEs (small businesses owned and controlled by socially and economically disadvantaged individuals, such as businesses owned by minorities and women). Contractors working on these transportation projects must make a good-faith attempt to meet specific DBE participation goals as a requirement of federal funding and can do so by subcontracting work that is actually performed and installed by a certified DBE.

The Schuylkill Products Case

In Schuylkill Products, SPI, its wholly owned subsidiary (CDS Engineers), and Marikina, a Connecticut-based contractor certified in Pennsylvania as a DBE, created a scheme through which Marikina subcontracted work to SPI that was federally mandated to be performed by a DBE. SPI employees, pretending to be Marikina employees, performed the work and received the profits. In order to give the appearance of compliance with the DBE rules to the federal government, PENNDOT, and the general contractor, SPI used Marikina business cards, email addresses, stationary, and decals in order to create the appearance that Marikina was performing the work.

Judge Rambo of the United States District Court for the Middle District of Pennsylvania found that this conduct fell squarely within the scope of the FCA and constituted clear violations of the FCA. Accordingly, the United States (and the former employee who initiated the FCA lawsuit) are entitled to monetary damages (the Court has not yet ruled upon the amount).

What Is the Takeaway from Schuylkill Products?

Schuylkill Products serves as a forceful reminder of the power of the FCA. The government, through its agencies and the private individuals that are permitted to enforce the FCA, monitors DBE compliance very carefully.

On the one hand, these programs provide excellent opportunities for small businesses to compete for government contracts on a more level playing field. On the other hand, the maze of rules and regulations that govern these programs must be taken seriously and followed carefully. In the face of this landscape, government contractors and contractors looking to enter the government contracting arena should consult with a construction attorney to ensure that their particular corporate structure, behavior, and contract comports with the rules.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Katherine Tohanczyn is a Summer Associate in the Construction Group of Cohen Seglias.

Pennsylvania Supreme Court Evenly Divided on Discoverability of Attorney-Expert Communications

Posted in Jennifer Horn, Matthew Erlanger, Pennsylvania

On April 29, 2014, an evenly divided Pennsylvania Supreme Court issued an order affirming the Pennsylvania Superior Court’s decision in Barrick v. Holy Spirit Hospital. The ruling means that communications between a party’s counsel and a party’s expert witness remain exempt from disclosure during discovery.

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Barrick v. Holy Spirit Hospital

In this case, arising out of injuries sustained in March 2006 due to a collapse of a chair in a hospital cafeteria, there has been much consideration of the issue of whether documents containing communications between a party’s counsel and the party’s expert witness are “discoverable,” i.e., whether they have to be turned over to the other party in the lawsuit. Initially, the trial court concluded that the documents had to be turned over. The Superior Court went back-and-forth on the issue and ultimately a full panel of judges determined that communications between counsel and an expert are beyond the scope of expert discovery under Pennsylvania Rule of Civil Procedure 4003.5(a)(1), which generally only allows for discovery through interrogatories, or written questions, of the substance of the facts and opinions of the expert’s expected testimony and a summary of the basis for each opinion. In addition, the Superior Court held that such communications are protected by the attorney work product doctrine under Pennsylvania Rule of Civil Procedure 4003.3, which generally protects the disclosure of the mental impressions of a party’s attorney.

Following the Superior Court’s ruling, the Pennsylvania Supreme Court granted review limited to a singular issue: whether the Superior Court’s interpretation of Rule 4003.3 giving absolute work product protection to all communications between a party’s counsel and their trial expert was proper. After hearing argument, the Supreme Court, consisting of only six justices as opposed to the full panel of seven (one of the Justices had been part of the Superior Court panel that previously ruled on the case), was evenly split with three justices in favor of affirmance and three justices in favor of reversal. As a result, the Supreme Court entered an order on April 29, 2014 affirming the Superior Court’s ruling.

Justice Baer (joined by Justices Todd and McCaffery) wrote an opinion in support of affirmance (“OISA”) and Justice Saylor (joined by Chief Justice Castille and Justice Eakin) wrote an opinion in support of reversal (“OISR”). The OISA argued in favor of a bright-line rule barring discovery of attorney-expert communications. The OISA also noted that the Procedural Rules Committee has proposed an amendment to Pennsylvania Rule of Civil Procedure 4003.5 that would expressly adopt the bright-line rule. The OISR argued that the Superior Court’s conclusion that all communication between counsel and an expert is protected, regardless of the content, is unsupportable. Instead, the OISR would consider the content of the communication at issue rather than holding that all attorney-expert communications are exempt from disclosure.

Impact

Because the Supreme Court was evenly divided on the issue presented, neither the OISA nor the OISR constitutes precedent, and lower courts are not bound by either opinion. Instead, the lower courts are to follow the Superior Court’s decision because a decision of the Supreme Court that is not comprised of a majority of the court is not binding precedent. As a result, the Superior Court’s en banc opinion continues to control, and as a rule, communications between an attorney and an expert are not discoverable.

It will be interesting to see what impact this case may have on the proposed amendment to Rule of Civil Procedure 4003.5, which would codify the Superior Court’s bright-line rule. It will also be interesting to see if the Pennsylvania Supreme Court will look to hear another case in order to create precedent with a majority opinion. Regardless of what may occur, for now, communications between a party’s counsel and a party’s expert witness remain not subject to discovery.

We will continue to monitor developments regarding discovery between an attorney and an expert and keep readers advised.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Matthew L. Erlanger is an Associate in the Construction Group.

PA Supreme Court Decides Bricklayers Case: Unions No Longer Have Mechanics' Lien Rights in Pennsylvania

Posted in Jason Copley, Liens, Lori Azzara, Pennsylvania

As we first reported back in January of 2012, the Pennsylvania Superior Court issued a decision in Bricklayers of Western Pennsylvania Combined Funds v. Scott’s Development Co. that significantly changed the meaning of the Pennsylvania Mechanics’ Lien Law. In its decision, the Superior Court expanded the Lien Law’s definition of “subcontractor” to include union members, giving the union trustee the ability to assert lien claims on behalf of its members for unpaid contributions to the union trust funds. This decision exposed contractors and owners to liability for a subcontractor’s failure to make benefit contributions, and we provided insight on strategies to avoid or limit such exposure.

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From a legal perspective, the Superior Court’s liberal construction of the Lien Law overturned decades of precedential case law that required contractors and subcontractors to comply strictly with the Lien Law requirements.

However, on April 17, 2014, the Pennsylvania Supreme Court unanimously reversed the Superior Court’s decision and held that union workers are not “subcontractors” under the definition in the Lien Law and that the union Trustees are not entitled to file a lien claim for unpaid benefit contributions.

It is worth noting that the Supreme Court did not weigh in on whether the Lien Law should be strictly interpreted and applied as it was prior to the subject case. Instead, the Court stated that the clear and unambiguous portions of the Lien Law should reflect the intent of the Legislature, while ambiguous provisions should be reviewed further.

What does this mean going forward? It is clear that union members do not have mechanics’ lien rights under the Lien Law and have thus lost a collection tool. With regard to the strict versus liberal interpretation of the Lien Law, we will have to wait for the Court to take another case raising that issue. However, given the reversal of the Superior Court’s ruling here, it can certainly be argued that the Supreme Court rejects liberal interpretations of the Lien Law. On the other hand, this ruling likely eliminates concerns that owners and general contractors had as a result of the Superior Court ruling. As always, we will continue to monitor any new developments.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Contractors Beware: Doing Change Order Work for School Districts Without Proper Approval May Waive Future Claim for Payment

Posted in Contract, Lisa Wampler, Lori Azzara, Pennsylvania

While by no means a recent law, Section 508 of the Pennsylvania Public School Code, 24 P.S. § 5-508, is becoming one that school districts are repeatedly relying upon to avoid paying contractors for work performed outside the original scope of their contracts. Specifically, Section 508 requires a majority vote of all members of a district’s school board any time the district enters into “contracts of any kind … where the amount involved exceeds one hundred dollars ($100).” A school board’s failure to comply with this Section renders any agreement reached with the school district void and unenforceable.

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Application of Section 508 is mandatory not only to the underlying contract but also to any subsequent modifications to the contract that would increase the district’s indebtedness under that contract, i.e., change orders. Unless a contractor can satisfy the heavy burden of producing evidence that a majority of the school board approved a change order, there is no obligation on the part of the district to pay for the additional work, even on equitable claims of unjust enrichment and quantum meruit.

While it may be common and, at times, necessary under the project schedule for contractors to perform additional work first and submit a change order request later, under Section 508, unless a majority of the school board voted to ratify the contract to include that additional work, no payment is required, even if it was performed at the direction of the district’s superintendent or other representative.

Section 508 is a law that contractors are rarely aware of and one that can be difficult to defeat once in litigation, given its mandatory application. While the practical application of Section 508 may be burdensome, it is critical for contractors to demand executed written change orders prior to performing work outside the scope of the original contract. Addressing this requirement upfront in the underlying contract may also serve to protect a contractor’s rights. Otherwise, contractors run the risk of waiving their right to receive payment later for performing additional work.

Lisa M. Wampler is a Partner in the Construction Group of Cohen Seglias Pallas Greenhall & Furman PC.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

Labor & Employment Law Seminar

Posted in Pennsylvania

Join Cohen Seglias’ Labor & Employment Group, including speakers Marc Furman, Jonathan Landesman, Shawn R. Farrell, and Steven M. Williams for a seminar on cutting edge labor and employment law issues impacting your business, April 30th at the Union League in Philadelphia and May 6th at the Hershey Country Club.

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Topics include:

• A Year In Review And A Look Ahead

• My Employees Can’t Sue Me For That, Can They?

• Dotting Your I’s And Crossing Your T’s: Agreements and Policies In The Workplace

This program has been approved for 3 CLE & CPE credits.

Continental breakfast starts at 8:00AM, the seminar begins at 8:30AM and ends at noon. For questions and to register please contact Rachel McNally at 215.564.1700 or rmcnally@cohenseglias.com.

Supreme Court's Pass on Berks Products Impacts PA Contractors

Posted in Daniel Fierstein, Jason Copley, Pennsylvania

Counterintuitive as it may seem, courts can exert significant influence by deciding not to consider a case. The Supreme Court of Pennsylvania did just that on April 1, 2014 when it decided not to consider an appeal in the Berks Products Corp. v. Arch Insurance Co. case (Berks). The underlying case involved a material supplier’s payment bond claim against a surety who issued bonding for the general contractor (GC) on a public school project for the Wilson Area School District.

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The Berks Decision and the “Safe Harbor” Provision

In Berks, the surety, Arch Insurance Company (Arch), was ordered to pay the bond claim of a supplier, Berks Products Corp. (Berks), even though the GC had paid its subcontractor for all of the materials that Berks supplied on the project. The subcontractor did not pay Berks in full for its materials and eventually went bankrupt, which led Berks to file its claim against the payment bond that Arch issued on behalf of the GC.

The Commonwealth Procurement Code (Code), which governs the award and administration of most public construction projects in Pennsylvania, contains a provision commonly referred to as the Safe Harbor Provision. The Safe Harbor Provision protects GCs and sureties from future claims if the GC has paid its subcontractor in full, even if the subcontractor has failed to pay a supplier.

The Berks decision is monumental (perceived by some members of the construction industry positively and, by others, negatively) because the Commonwealth Court concluded that the specific language in the GC’s payment bond required Arch to pay Berks’ claim even though the GC paid its subcontractor for all of Berks’ materials. In other words, according to the Court, the language in the payment bond waived the protection of the Code’s Safe Harbor Provision.

Likely Implications

With the Supreme Court’s recent denial of Arch’s Petition for Allowance of Appeal, the practical implications of Berks will now become a permanent reality in the absence of new legislation. The implications for public projects are likely to include the following, some of which could increase the costs and risks of doing business for companies at all tiers in the construction industry:

  • In light of the perception of sureties that the Safe Harbor Provision could be under attack, they will likely reexamine the language of their payment bonds to make sure the language is in lockstep with the Safe Harbor Provision and does not contain the Berks language . Sureties may also reevaluate the risks and costs of providing bonding in Pennsylvania.
  • Sureties and GCs may even take steps to pursue legislative changes because of what they perceive as unintended consequences of Berks on the Bond Law and the Safe Harbor Provision.
  • Second-tier contractors/suppliers like Berks are obviously pleased with the result and will continue to assert bond claims even where GCs have paid subcontractors in full, using Berks as their authority.
  • GCs may take additional steps to avoid the fate that Arch (as indemnified by the GC) has suffered in Berks that include: (i) confirming that their payments are making their way to lower-tiered subcontractors by way of releases and actual verification of payment, (ii) increasing their use of joint check agreements, and (iii) requiring their subcontractors to obtain bonding for the project.

We will be expanding our coverage of this case and the effects it may have on the construction industry in the next volume of our newsletter, Construction in Brief, which will be available electronically within the next couple of months. If any of our readers have questions about Berks and its implications for the industry, please feel free to contact us.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Messy Solar Construction Litigation Sheds a Little Light on the Intersection of New Jersey Lien Statutes and Public Private Partnership

Posted in Daniel Fierstein, Jennifer Horn, Liens

A recent case before the Appellate Division of the Superior Court of New Jersey (Morris County Improvement Authority and Somerset County Improvement Authority v. Power Partners Mastec, LLC) involving solar construction has shed light (pun intended) on the complications associated with projects that are publicly and privately owned and financed, especially with regard to municipal mechanics’ liens and private construction liens. As the parties in MasTec learned the hard way, the intersection of public and private lien rights can wreak havoc on contractor and subcontractor lien rights. All bidders are wise to consider the ramifications prior to submitting a bid.

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New Jersey Lien Law: A Tale of Two Statutes

Before we get into the particulars of the MasTec case, recall that New Jersey has two lien statutes: (1) the Municipal Mechanics’ Lien Law (MMLL) and (2) the Construction Lien Law (CLL). The MMLL applies to public projects and allows subcontractors and suppliers (not contractors) to have a lien placed upon the project funds for the unpaid amount of work it performs. The CLL, on the other hand, permits contractors, subcontractors, and suppliers to place a lien against the relevant privately owned property interests for the unpaid amount of work it performs.

The MasTec Project P3 Financing Structure

In the MasTec case, the Morris County and Somerset County Improvement Authorities (the Authorities) hired SunLight General Capital, LLC (SunLight) to design and construct about seventy solar energy generating systems (SGF’s) on properties owned or occupied by government entities in Morris, Somerset, and Sussex Counties. Seventy percent of the Project was to be funded by taxable municipal bonds, and the remaining thirty percent was to be financed privately through SunLight; a classic public-private partnership arrangement.

Under this public-private partnership, the Authorities would own the SGF’s and lease them to SunLight for a minimum of fifteen years (after which SunLight would have the option to purchase the SGF’s for a nominal price). Meanwhile, SunLight contracted with MasTec to build the SGFs, and MasTec was to be paid with funds generated from the municipal bonds. Confused? You should be, because it’s confusing.

When Payment Was Withheld, MasTec Filed Two Types of Liens

Project delays ensued, and MasTec, concerned it would not be paid monies owed for its work, filed approximately $50 Million of liens under both of the New Jersey Lien Statutes. First, MasTec filed one set of liens under the MMLL against $50 Million of the public funds generated from the municipal bonds. A trial court, however, ruled that the liens were invalid because MasTec was not a “subcontractor” as the term is defined in the MMLL. Next, MasTec filed a second set of liens under the CLL against SunLight’s leasehold interest in the SGF’s, including SunLight’s rights to draw down the project funds from the municipal bonds.

Unfortunately for MasTec, the Appellate Division ruled against it with respect to both sets of liens. With regard to MasTec’s municipal mechanics’ liens, though the Court agreed with MasTec that it is a “subcontractor” under the MMLW, it also concluded that another statute, the County Improvement Authorities Law, protects County Improvement Authorities like the Morris County and Somerset Improvement Authorities from municipal mechanics’ liens.

As for MasTec’s construction liens, the Court held that such liens could attach to SunLight’s leasehold interest on the properties but not on the municipal bond funds. In so holding, the Court reasoned that bond funds are not “real property” under the CLL. This ruling undermines the force and effect of MasTec’s construction liens because the liens will have no effect on the disbursement of the municipal bond funds.

Proceed with Caution: In This Developing Area of the Law, Liens May Not Have the Expected Effect

This intersection of public and private interests is a relatively new and untapped area of the law that, as demonstrated in MasTec, can wreak havoc on contractor and subcontractor lien rights and must be carefully considered prior to bidding. The MasTec case teaches that when public and private interests intersect, the application and effect of lien law is impacted.

This case is particularly interesting because of the complicated array of public and private contractual relationships. On the one hand, the Improvement Authorities, which own the SGF’s, publicly bid the project with seventy percent of the funds to come from the public. On the other hand, the Improvement Authorities leased the SGF’s to the private developer and thirty percent financier in SunLight.

We will continue to monitor this case, as MasTec could petition the New Jersey Supreme Court to consider an appeal of these issues. It is also interesting and worth noting that MasTec and SunLight are currently embroiled in arbitration to determine which party is responsible for the delays and cost overruns that took place during construction.

In the meantime, all parties involved in similar P3 financed projects should reassess the force and effect of New Jersey’s lien statutes as avenues for recovering payment.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate. 

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.