New Jersey Appellate Court Addresses Whether Pay-if-Paid Clauses Are Enforceable

Cohen Seglias Pallas Greenhall & Furman PC
In the construction industry, a “pay-if-paid” provision is common in subcontracts, which conditions the general contractor’s obligation to make payment to the subcontractor on the general contractor’s actual receipt of payment from the owner. In other words, the general contractor actually receives payment from the owner, neither the general contractor nor its surety have any legal obligation to pay the subcontractor. Whether a pay-if-paid provision is enforceable varies from state to state.

Some states, including Delaware and Virginia, have statutes in place making pay-if-paid provisions unenforceable in most circumstances. In other states, including Pennsylvania, the courts have generally held pay-if-paid provisions enforceable as written.

New Jersey courts had never addressed whether a pay-if-paid provision is enforceable until the New Jersey Superior Court, Appellate Division recently decided in JPC Merger Sub LLC v. Tricon Enterprises, Inc.

In JPC, Tricon, as the general contractor, sent a purchase order to JPC for the supply of fabricated concrete box beams for work on a public improvement project for Union County. As written, the purchase order contained pay-if-paid language stating that “Vendor [JPC] understands and agrees that Tricon’s obligation to make any payment to Vendor is subject to, and shall not exist unless and until Tricon’s receipt of payment on account of Vendor’s work from the Owner” and that “the occurrence and satisfaction of which shall be a condition precedent to Tricon’s duty to remit payment.” In addition, the pay-if-paid provision stated that Tricon would pay within 14 days of receiving payment from the county.

JPC made revisions to the purchase order, including reducing the time for Tricon to pay after receiving payment from the county from 14 days to seven days. In addition, elsewhere in the purchase order, JPC wrote, “ALL PAYMENTS WITHIN 45 DAYS OF [JPC’S] INVOICES.” However, JPC did not delete the pay-if-paid language. Following JPC’s changes, both parties signed.

JPC then began fabricating the box beams and submitting invoices—10 in total. While Tricon paid the first two invoices, Tricon refused further delivery of the remaining box beams and refused to pay the remaining invoices because the county did not relocate certain high voltage power lines necessary for the work on the project to move forward, and did not pay Tricon for the remaining box beams. The county took a contrary position that Tricon was responsible for making arrangements with the utility company to relocate the power lines.

As a result of Tricon’s failure to pay, JPC submitted a claim to Tricon’s payment bond surety, QBE Insurance. Because Tricon and QBE took the position that payment was not due as a result of the pay-if-paid language, QBE also refused payment. JPC then filed a lawsuit against Tricon and QBE. Tricon and QBE moved for summary judgment based on the pay-if-paid provision, and the trial court found the pay-if-paid provision applicable and enforceable and granted the motion, dismissing JPC’s lawsuit. JPC then appealed.

On appeal, the Appellate Division addressed the enforceability of pay-if-paid provisions. The court concluded that New Jersey recognizes the freedom of parties to contract as they wish. As a result, the court held that as long as the contract contains “clear and unambiguous” language showing an intent to make the general contractor’s obligation to make payment conditional on receiving payment from the owner, pay-if-paid provisions are enforceable. However, the court cautioned that a pay-if-paid defense could be defeated if the owner’s reasons for not paying were the result of the general contractor’s conduct or actions.

Viewing the language of the purchase order, the Appellate Division determined that the parties agreed to be bound by the pay-if-paid provision. While JPC argued that the obligation to make payment within 45 days after the invoice modified the pay-if-paid provision, the court found that this merely created a timetable for Tricon’s payment schedule, while the pay-if-paid language constituted an “absolute precondition” to any obligation to make payment.

Despite acknowledging the enforceability of the pay-if-paid provision, the Appellate Division reversed the trial court’s dismissal of JPC’s claims. Instead, the court found that there was a factual dispute as to whether Tricon’s actions or conduct caused the county not to pay, and, if so, this could make Tricon responsible for payment regardless of whether the county paid. As a result, the Appellate Division determined that a trial was necessary.

Based on the Appellate Division’s holding in JPC, there is now greater clarity in New Jersey that pay-if-paid provisions will be enforced as long as they are clear and unambiguous and as long as the general contractor is not responsible for the owner’s failure to make payment. As a result, it is expected that general contractors will rely upon pay-if-paid provisions to a greater extent than they do currently. But, for subcontractors, it will now be increasingly important to review the payment provisions in your subcontracts to determine whether there exists an obligation to make the payment if no payment has been received because we now know that courts will enforce such provisions.

Negotiating contractual language can be difficult for even the most sophisticated contractors. Should you have any questions about this decision and revisions that should be made to your subcontracts, feel free to contact the lawyers at Cohen Seglias who can guide you through this process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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