Effective February 10, 2019, the New Jersey Legislature has greatly expanded the pool of public entities authorized to enter into Public-Private Partnerships (P3), including local governments, school districts and public authorities. The New Jersey Legislature, pursuant to N.J.S.A. 40A:11-52 (“P3 Law”), defines a P3 project as a contractual agreement between a public agency and a private entity in which the private entity designs, finances and builds a large-scale project “of, or for the benefit of” the public agency. After a P3 project is completed, the private entity operates and maintains the project for a period before turning it back over to the public agency. Prior to the new P3 Law, only state and county colleges, as well as the New Jersey Transit Authority could enter into P3s, but only under certain limited circumstances. With billions in upgrades needed throughout New Jersey, the new P3 Law is expected to generate a significant number of new projects throughout the Garden State.
While many celebrate the potential benefits of the new P3 Law, contractors should not be lulled into complacency. Foremost, because a P3 project is not strictly a private or a public project but, rather, a sort of hybrid, the availability of long-established payment protections, such as the right to file a construction lien, are sometimes difficult to assess. A recent New Jersey case provides a clear warning to contractors to not sleep on their rights.
In Morris County Improvement Authority v. Power Partners MasTec, LLC et al., 2014 WL 1125378 (App. Div. 2014), the New Jersey Appellate Division had occasion to review a series of mechanic’s lien filings on a hybrid project. The project involved the construction of seventy-one (71) solar facilities in three (3) counties to be constructed on publicly owned land. A private entity was listed as the “Developer” of the project, and the project was financed by a total of $88.8 million in municipal bonds issued by the three (3) counties. MasTec, as contractor, became embroiled in a dispute with the Developer and the “operator”, alleging that it performed more than $80 million worth of “construction services”, but was paid only $33 million. MasTec filed a series of Municipal Mechanic’s Liens totaling almost $50 million. The Morris Improvement Authority, acting on behalf of the public agencies, filed suit seeking to discharge the Municipal Mechanic’s Liens. The trial court determined the Municipal Mechanic’s Liens did not meet the requirements to file a lien on a public project. Thereafter, MasTec filed Construction Lien Claims but the trial court limited those private liens to the “Developer’s” interest in the real property—which effectively rendered the liens powerless to affect the disbursement of the project funds. On appeal, the New Jersey Appellate Division affirmed (on different grounds) the discharge of MasTec’s Municipal Mechanics’ Liens. Moreover, the Appellate Division was clear that a Construction Lien can only attach the “real property”, and not the public funds or funds generated by operation of the facilities. As such, MasTec was effectively left without any enforceable lien rights. As a result, unless the New Jersey Legislature amends the P3 Law, contractors performing work on a P3 project may not have enforceable lien rights.
However, all hope is not lost for securing payment for labor and materials furnished on a P3 Project. One takeaway is that while a contractor/supplier on a P3 project may not have lien rights, they do have two (2) potential avenues of recovery. The first avenue for recovery, and perhaps anticipating this issue and in an proactive attempt to keep the finances on a P3 project above board, the New Jersey Legislature requires the private entity on a P3 project to appoint a “third-party financial institution” to “act as a collateral agent, and manage the construction account, and maintain a full accounting of the funds and instruments in the account”. The account is effectively held in trust for the benefit of the contractor, construction manager and design-build team. In that sense, on a P3 project the moment a payment issue arises, written notice should be delivered to the “collateral agent” to hopefully ensure funds are not improperly disbursed.
The second avenue for recovery, and an even more important tool for ensuring payment is the potential ability to file a payment bond claim on a P3 project. In order to properly assert a payment bond claim you need to be knowledgeable of the many technical requirements and statutory loopholes in both the P3 Law and the Public Works Bond Act. For example, a contractor/supplier cannot recover against the bond for any “extra work” that is not the subject of a written change order between the Owner and General Contractor. Additionally, pursuant to the Public Works Bond Act, only “subcontractors or material suppliers in contract with the contractor” or “subcontractors or material suppliers in contract with a subcontractor to the contractor” may submit a payment bond claim. For P3 projects in New Jersey, a contractor would be advised to ensure the inclusion of key terms and conditions in its contract, and to provide proper written notices, which efforts culminate in the submission of a timely and proper payment bond claim immediately after a contractor defaults in its payment obligations. Given the risks, you should consult a competent construction attorney to assist with payment issues as early as possible on any P3 project.