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O.A. Peterson Construction Co., Inc. v. Englewood Hospital and Medical Center


June 30, 2010


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1367-06.

Per curiam.


Submitted May 24, 2010

Before Judges Reisner and Chambers.

In this construction contract dispute, plaintiff O.A. Peterson Construction Co., Inc. (OAP) appeals from an October 7, 2008 judgment awarding approximately $19,000 to defendant-counterclaimant On Par Contracting Co., Inc. (On Par). In turn, On Par cross-appeals from the judgment, claiming it is entitled to an additional $45,000.*fn1 We affirm the judgment.

OAP was the general contractor on a construction project for Englewood Hospital (Hospital or owner). On Par was one of the subcontractors on the project. The contract between OAP and On Par contained the following provision concerning OAP's obligation to pay On Par:

It is expressly understood and agreed that the receipt by the Contractor of payment for the Subcontractor's work shall be a condition precedent to the Contractor's obligation to pay the Subcontractor. That is, the Contractor shall have no liability or responsibility for any amounts due or claimed to be due the Subcontractor for any reason whatsoever except to the extent that the Contractor has actually received funds from the Owner specifically designated for disbursement to the Subcontractor. [Emphasis added.]

OAP contends that this language constituted an unambiguous "pay if paid" clause, which shifted to On Par the risk of the owner's nonpayment for the work. OAP faults the trial judge for interpreting the clause as delaying, but not defeating, the subcontractor's right to be paid for its work, and for allegedly failing to make a finding of fact as to whether the owner made a payment specifically designated for On Par's work.

According to OAP's brief, the clause required On Par to establish, as a condition precedent to its right to payment, "the receipt by OAP of funds 'specifically designated for disbursement to the Subcontractor.'" OAP further contends that toward the end of the contract period, the Hospital stopped making payments, leading to litigation. OAP asserts that it settled the litigation with the Hospital in an agreement that did not specifically designate how much of the settlement was attributable to work performed by On Par. Based on that assertion, OAP's brief further contends that "the Owner made no payment of funds to OAP that were 'specifically designated' for On Par" and therefore under the pay if paid clause, OAP owes On Par nothing because On Par "accepted the risk that the Owner would not make full payment of the contract price, from which On Par would be paid."

On this appeal, On Par does not disagree with OAP's construction of the clause as requiring, as a condition of payment to On Par, proof that the Hospital paid OAP for On Par's work. In fact, at the trial, On Par's first witness Derek Smith agreed with that interpretation of the contract. However, On Par claims that OAP breached the clause. On Par contends that OAP submitted two applications to the Hospital specifically requisitioning payment for On Par's work, and the Hospital paid OAP in response to those requisitions. OAP then breached the clause by misrepresenting to On Par that the Hospital had not paid, and by failing to remit payment to On Par. At the trial, On Par introduced evidence to support that position through Smith, a witness the judge later found entirely credible.*fn2

In response, OAP contends that the trial judge did not make any findings as to whether OAP received payment of the requisition invoices cited in On Par's appellate brief.

Alternatively, OAP argues that the record reflects that On Par was actually paid for the work reflected in those invoices.

In an October 7, 2008 oral opinion, the trial judge found that OAP did not deny receiving payment from the Hospital. Instead, OAP claimed it delayed payment to the subcontractor because On Par abandoned the job, and filed a construction lien*fn3 O.A. Peterson contends that they did not pay, because when they received the payment, the lien was in place, the lien had to be removed prior to payment.

Furthermore, O.A. Peterson indicates On Par abandoned the job.

The judge found that OAP violated the "pay when paid" clause, because OAP failed to make payment even after the construction lien was removed. He also did not credit testimony from OAP's witnesses, particularly its project director Craig Buermann, that On Par abandoned the job. He believed On Par's witness Derek Smith who testified that On Par stayed on the job and completed the punch list items.

Addressing the contract interpretation issue first, we find that the "pay if paid" clause unambiguously shifted the risk of non-payment to the subcontractor. That is, the clause clearly anticipated that as the contract progressed, the owner would make periodic payments to the general contractor, with portions being designated as payment for work performed by each specific subcontractor on the job. If the owner refused to pay for a particular subcontractor's work, the general contractor was not obligated to pay that subcontractor until the dispute was resolved and the owner made payment. Therefore, to the extent the judge's opinion can be read as requiring OAP to pay On Par even if the Hospital did not pay OAP, we disagree with his construction of the clause.

However, that is not critical to our decision of this case, because the record reflects that OAP received payments from the Hospital designated for On Par's work.*fn4 To the extent the trial judge failed to make more explicit findings of fact on that issue, it was because OAP admitted receiving those payments but claimed it withheld payment to On Par for legally appropriate reasons. However, the judge found OAP's explanations for its nonpayment unpersuasive.

Moreover, on this appeal, OAP has made factual representations that would defeat its right to recover, even if we remanded this case to the trial court.*fn5 In particular, we cannot agree with OAP's appellate argument that it could enter into a settlement with the owner that did not designate a portion of the settlement funds for disbursement to a subcontractor, and then rely on the "pay if paid" clause to defeat that subcontractor's right to payment. That argument overlooks the covenant of good faith and fair dealing implicit in every contract. See Sons of Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 420-21 (1997).

In this case, the covenant of good faith and fair dealing would preclude OAP from unilaterally waiving, through a settlement with the owner, On Par's right to be paid for its work. Indeed, taken to its logical conclusion OAP's argument would allow it to avoid paying any subcontractor, by reaching a settlement with the Hospital that did not specifically designate payment for that subcontractor. Further, the record does not support OAP's factual assertions. In his testimony, OAP's project manager Buermann denied that OAP had back-charged On Par for any concessions OAP made to the Hospital in the settlement.

Based on the trial judge's findings, which are supported by the record, we reject OAP's appeal and affirm. On the other hand, we must decide the cross-appeal in OAP's favor. In its cross-appeal, On Par challenges, as against the weight of the evidence, the trial judge's finding that OAP was entitled to a $45,000 set-off based on On Par's failure to perform certain PVC wallpapering work. Our scope of review of the trial judge's decision is very narrow, and we must affirm his decision so long as it is supported by sufficient credible evidence in the record. See Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974).

We owe particular deference to the judge's credibility findings which, in this case, were at the heart of his decision. Cesare v. Cesare, 154 N.J. 394, 412 (1998). The judge believed OAP's witnesses, who testified that On Par (a) admitted it could not do the wallpapering work and (b) agreed that OAP could pay another firm to do the work and deduct the cost from On Par's contract. We find that the judge's decision on the set-off issue is supported by substantial credible evidence. Accordingly we affirm as to On Par's cross-appeal as well as OAP's appeal.


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