Caveat Venditor (Supplier Beware): The Importance of Accurate Accounting When Providing Materials to Contractors Working on Multiple Projects

A recent New Jersey Appellate Division case imposes a significant burden on lien-claimant material suppliers that supply materials to contractors on multiple construction projects. As discussed in the February 13, 2013, article “A Duty to Inquire Under Lien Law,” New Jersey Law Journal, Vol. 211 – No. 6, the court in L&W Supply Corp. v. DeSilva, addressed what is necessary for a material supplier to satisfy its obligation to apply payments on the account from which the payment obligation arises in order to preserve its construction lien rights, if any.

According to the L&W court, in order for a material supplier to be able to file a valid construction lien, it must take “affirmative steps” to determine for which project a contractor is providing a payment, and be able to demonstrate that it has properly applied the payments to the correct projects. Significantly, these affirmative steps, in appropriate circumstances, can even involve contacting the prime contractor(s) or owner on a project in an effort to determine to which project a payment should be applied. Generally, if the purchasing contractor provides credible information as to how to allocate a specific payment, that should be sufficient to allow the supplier to apply a payment to a specific project (and retain its rights under the Construction Lien Law). Any time, however, that the supplier is not provided with “specific [and] reliable” instructions regarding the allocation of payment, or there are other circumstances that would cause a reasonable supplier to doubt the origin of a specific payment, the obligation to make further inquiry of the prime contractor and/or owner will arise.