Appellate Division finds that the pay-if-paid clause in the construction contract is enforceable.

The plaintiff entered into a purchase order contract with the defendant, the general contractor on a project with the County of Union. The contract contained a pay-if-paid provision specifying that the plaintiff would be paid only if the County paid the defendant. The plaintiff’s president made unilateral handwritten changes that conflicted with certain pre-printed terms, including the contract price and the payment schedule, which were never agreed to by the defendant. 

The County stopped paying the defendant, who, in turn, stopped paying the plaintiff. The plaintiff sued the County, the defendant and the defendant’s surety, alleging breach of contract and other claims. The defendant filed a counterclaim against plaintiff, alleging that it breached the contract by attempting to enforce payment prior to it having a duty to pay. The plaintiff filed a motion to dismiss the counterclaim, and the surety cross moved for summary judgment, arguing that under the pay-if-paid provision, neither the defendant nor it, as its surety, had a duty to pay the plaintiff when the County had not yet paid the defendant. The trial judge concluded that the plaintiff’s handwritten modifications were unenforceable as a matter of law and that the pay-if-paid provision was applicable and enforceable. The trial court denied the plaintiff’s motion to dismiss the counterclaim and granted the surety’s motion for summary judgment. The plaintiff’s motion for reconsideration was denied, and the matter was brought before the Appellate Court on an interlocutory appeal.

The Appellate Court first noted that there is no statute or published case law governing the enforceability of a pay-if-paid contract provision. After reviewing the law in other states on this issue, the court held that as long as the contract specifies a clear and unambiguous intent and agreement by the parties to shift the risk of nonpayment, a pay-if-paid provision is enforceable subject to the parties’ implied duty not to frustrate conditions precedent to their performance. 
 
The final issue addressed by the Appellate Court was the applicability of a pay-if-paid clause if the defendant was the cause of the County not paying it. The trial court ruled that the clause was silent on the issue of fault, so the pay-if-paid clause was enforceable. 
 

_{Case Law Alerts, 2nd Quarter, April 2023 is prepared by Marshall Dennehey to provide information on recent developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2023 Marshall Dennehey, all rights reserved. This article may not be reprinted without the express written permission of our firm.}