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Houdaille Construction Materials Inc. v. American Telephone & Telegraph Co.

Decided: January 29, 1979.


McElroy, J.s.c.


[166 NJSuper Page 174] On May 15, 1974 defendant American Telephone & Telegraph Company (AT&T) entered into a contract with defendant Turner Construction Company (Turner) for the latter to act as construction manager for the Long Lines Headquarters building complex to be built on property owned by AT&T in Bedminster Township, New Jersey. On June 20, 1974 Turner entered into a contract with Barnaby Concrete Company (Barnaby) for the latter to act as contractor on a portion of the AT&T construction

project specifically relating to the cast-in-place concrete work. Both of the above contracts referred to and incorporated by reference certain general contract conditions.

Prior to awarding the contract to Barnaby, Turner reviewed the qualifications of several proposed bidders, including Barnaby, and concluded, on the basis of prior experience with Barnaby, a review of Dun and Bradstreet reports and other information, that Barnaby was qualified to bid on this particular project.

Plaintiff Houdaille Construction Materials, Inc. (Houdaille) is a supplier of concrete. Before plaintiff began supplying concrete to Barnaby at the AT&T site, plaintiff through Mr. Zamrock, its senior vice-president, approved granting credit to Barnaby on the AT&T job. There was no upper limit on this credit, either in terms of dollar amount or in the time between delivery of the concrete and payment for said delivery. This grant of credit was based upon experience with Barnaby over a number of years, involving at least three construction projects.

Houdaille issued a series of price quotations to Barnaby with respect to this construction project. These quotations became the basis of the contractual relationship between Houdaille and Barnaby. When a shipment of concrete was necessary Barnaby would call Houdaille to relate the amount and type of concrete needed and a delivery ticket would be given to Barnaby's representative at the time of delivery.

At the end of every month Houdaille would issue invoices to Barnaby for the concrete delivered during that month. The invoices recited that they were payable within 30 days. Houdaille, however, did not expect payment within that period of time. Houdaille had a long-standing relationship with Barnaby under which Barnaby would pay Houdaille $75,000 to $100,000 a month without regard to the amount of concrete delivered during the previous month.

During the period of time relevant to this litigation Houdaille never saw any of the contract agreements between AT&T, Turner and Barnaby, nor was Houdaille ever advised

by either AT&T or Turner that any funds were being retained from the periodic payments being made to Barnaby. Houdaille had no idea of the amount of retainage, if any, until some time in May 1976.

The AT&T-Turner-Barnaby contracts called for periodic progress payments to be made to the contractor based upon the percentage of work which had been completed to date. The procedure was that the contractor would submit an application to Turner based upon the amount of work completed during the applicable month. Turner would review the application and pass it on to AT&T together with applications received from other contractors. After all the applications were reviewed and approved or modified as necessary, AT&T would issue one check to Turner, who would then disburse the funds among the contractors as indicated on the various applications for payment.

Each application was accompanied by a document entitled "Affidavit-Waiver and/or Release of Lien," which related to the payment received for the previous month's application. Each of the affidavits contained, in paragraph 5, a statement that the contractor waives and releases all liens and claims against AT&T and, in paragraph 3, that all laborers, subcontractors, materialmen and suppliers, "including but not limited to those listed in Exhibit A attached to and made a part hereof," have either been paid or have waived or released any and all claims against AT&T, and that no person or party other than the contractor has any claim or right to a lien on account of the work done.

Initially, some attempt was made to obtain the Exhibits A referred to in the affidavit but because of the number of contractors, subcontractors and suppliers involved, that process became too cumbersome, and Turner and AT&T agreed to discontinue the use of Exhibit A. The use of Exhibit A was reinstituted, to some extent, after the Barnaby-Houdaille problem erupted in April and May of 1976.

Paragraph 9.3.5 of the General Conditions of the contract provided:

[W]ith each application for payment, the Contractor must submit a waiver of lien against the work for which he was paid under the previous application for payment, such waivers being required for all obligations detailed on his previous application for payment including the Contractor's own work, the work of his Subcontractors, and material furnished by his suppliers.

Paragraph 9.4.1 of the General Conditions provided that after the applications for payment have been approved by the construction manager and the owner, the construction manager will pay to the contractor those amounts deemed properly due within the period specified. Paragraph 9.4.2 goes on to state that "by issuing a certificate for payment, the Construction Manager shall not thereby be deemed to represent that he has made any examination to ascertain how or for what purpose the Contractor has used the monies previously paid on account of the contract sum." No other provision of the contract between Turner and AT&T or of the General Conditions requires the construction manager to make any inquiry as to the use to which a contractor puts the funds paid to him or to determine that all materialmen and suppliers have been paid.

Paragraph 2 of Article XVII of the AT&T-Turner contract provides that

Article X of the contract provided that "[n]othing contained herein shall be deemed to create any contractual relationship between the Construction Manager and the Architect, nor shall anything contained herein be deemed

to give any third party any claim or right of action against the Owner or the Construction Manager." It is also provided in paragraph 1(a) of Article XXIV of the contract that applications shall be submitted monthly and "shall be in form and detail acceptable to the Owner covering those portions of the Construction Cost for work completed during the previous month and shall have attached such waivers of lien and affidavits as the Owner may require." The affidavits obtained by Turner from Barnaby with each application were on the forms prescribed by AT&T, and AT&T concurred in the decision to not insist on the incorporation of Exhibit A into said affidavits except for the initial period.

From each progress payment 10% of the total amount was retained as security for the proper completion of the job. On September 11, 1975 the retainage on the Barnaby contract was reduced from 10% to 5% and approximately $309,000 was paid over to Barnaby at that time. A second reduction of reserve to a fixed sum of $50,000 took place on March 17, 1976 when approximately $258,000 was released to Barnaby.

The first delivery of concrete to the AT&T project occurred in July 1974 and the first Houdaille invoice to Barnaby was issued on July 31, 1974.

Late in 1975 or early 1976 Barnaby approached Houdaille and requested that it not bring the status of Barnaby's account with Houdaille to the attention of either AT&T or Turner because Barnaby was then in the process of negotiating a new contract with Turner concerning another project. At a meeting which was held in January 1976, Houdaille agreed that it would not voluntarily release any information to AT&T or Turner concerning the Barnaby account because Barnaby was a valued customer of Houdaille. Up to this point Turner had made no inquiry of plaintiff as to the status of the Barnaby account.

On April 5, 1976 Barnaby requested that Turner release the payment for April approximately two weeks early for the specific purpose of permitting Barnaby to make a payment

to Houdaille. The $125,000 released did in fact reach Houdaille and was credited against Barnaby's account. On April 22, 1976 Turner became aware that Barnaby was delinquent in its payments to the Ironworker's Fund. Turner's project supervisor, Robert Fee, called O.P. Jack, a Houdaille salesman, on the same day but was advised that the Houdaille-Barnaby account was current.

On April 24, 1976 Mr. Knight, plaintiff's sales manager, met with representatives of Turner to inform them that Barnaby's account with Houdaille was in fact delinquent. On April 27, 1976 a meeting was held at the job site and the magnitude of Barnaby's debt to Houdaille, approximately $376,000, was disclosed to Turner. At a subsequent meeting in May 1976, Houdaille was advised that Turner and AT&T would not ...

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