When a contractor performs work on or a supplier supplies materials to a public project (as opposed to a private or state project), and meets the necessary statutory requirements, that contractor or supplier has a right to file a Municipal Mechanic’s Lien pursuant to N.J.S.A. 2A:44-125 et seq. However, even if the contractor or supplier diligently notices, files and perfects their Municipal Mechanic’s Lien, their right to payment from the municipality or county can be jeopardized if the project is a) abandoned by the prime contractor, b) there are cost overruns due to deficient performance or c) non-completion by a general contractor or subcontractor requires the municipality to pay out all project specific funds to a second prime contractor in order to complete the project.
The law in New Jersey on this issue is spelled out in a case affirmed by the Court of Errors and Appeals of New Jersey (the predecessor to the New Jersey Supreme Court):
The legislative purpose [of the municipal mechanic’s lien statute] was essentially to subrogate the laborers and materialmen who had acquired rights against the contractor (rights to payments from him), to the rights which the contractor had acquired against the municipality; it was to give those laborers and materialmen the right and the power to see to it that the moneys which the municipality became obligated to pay to the contractor (or so much thereof as was necessary) should actually go to the payment of the work and materials which went into the building. But there is nothing expressed in, or to be implied from, the provisions of the statute which indicates any intent to give to the laborers or materialmen any rights against the municipality in or to any moneys to which the contractor never became entitled as against the municipality.
In the instant case, the municipality completed the contract (after the surety, as well as the contractor, had refused to complete), and in so doing was compelled to spend and did spend, more than the balance of the contract price remaining unpaid to the contractor (including the retained percentage). It therefore applied the retained percentage to the completion of the contract, as it had the right to do, and thereby exhausted the retained percentage, so that none of it ever did grow actually due to the contractor; and none of it is available to the lien claimants.
Johnson v. Fred L. Emmons, Inc., 115 N.J. Eq. 335 Ch. 1934), aff’d o.b., 119 N.J. Eq. 88 (E. & A. 1935)(emphasis added). In sum, contractors and suppliers’ rights to payment by the municipality on a Municipal Mechanic’s Lien are limited to the amount earned by the prime contractor to the extent that money has not already been paid out by the municipality. If a project is abandoned or defective work has been performed and the municipality must pay remaining project specific funds that have not been earned by the initial prime contractor, to a second contractor in order to complete the project, the lien claimants have no right to those funds.
The Johnson case also demonstrates the importance of moving swiftly to enforce lien rights. In Johnson, the right of one lien claimant to payment by the municipality was upheld with respect to a lien duly filed before the municipality paid out all earned funds. Retainage was excluded from this amount as the court determined the municipality had a right to the retainage that was superior to the lien claimants since the purpose of the retainage was to secure completion of the contract.
Under a Municipal Mechanic’s Lien, the contractor or supplier’s right to payment from the municipality is limited to the amount earned, but not paid to the prime contractor by the municipality (the contractor or supplier may have a right to money already paid to the prime contractor or a subcontractor, but money already paid out by the municipality is governed by the Trust Fund Act). So if a municipality is forced to pay all of the money it has designated for a specific project to a second prime contractor in order to complete an abandoned or incomplete project, a lien claimant may be unable to collect any money from the municipality even if its lien claim is valid.
Taking the applicable law into consideration, contractors and suppliers are wise to a) promptly file Municipal Mechanic’s Liens so as to secure their right to payment before a municipality pays out all funds, and b) carefully consider the reputation of contractors or subcontractors with which they contract even on municipal and county jobs. A contractor or supplier should not assume that their right to payment by the municipality in such situations is guaranteed even if a Municipal Mechanic’s Lien is properly filed.
The construction lawyers of the Law Office of Bart J. Klein devote a significant amount of their practice to New Jersey construction law and litigation, including construction liens and municipal mechanic's liens. We welcome you to contact us for further information.