Defense Digest, Vol. 29, No. 2, June 2023

Pay-if-Paid Clause in Construction Contract Found to Be Enforceable

By
Pauline F. Tutelo

Key Points:

  • New Jersey Appellate Division rules on enforceability of “pay-if-paid” provision of construction contract.
  • Court held that “pay-if-paid” provision was applicable and enforceable.
  • Nevertheless, more litigation regarding the enforceability of “pay-if-paid” provisions is likely. 

Recently, the New Jersey Appellate Division ruled on the enforceability of a “pay-if-paid” provision contained in a construction contract. See JPC Merger Sub LLC v. Tricon Enterprises, Inc., 286 A.3d 1186 (N.J. Super. App. Div. 2022). The facts of this case tell a familiar story. However, the issues they elicited were a matter of first impression to the Appellate Court. 

Briefly, the plaintiff, JPC Merger Sub, LLC d/b/a Jersey Precast, entered into a purchase order contract with Tricon, the general contractor on a project with the County of Union, for the construction of a bridge. Tricon’s purchase-order contract contained a pay-if-paid provision specifying that the plaintiff would be paid only if the County paid Tricon. Upon receipt of this purchase order, the plaintiff’s president made unilateral handwritten changes that conflicted with certain pre-printed terms, including the contract price and the payment schedule. These handwritten modifications were never agreed to by Tricon. These changes included, among other things, a provision requiring that all payments be made within 45 days of the plaintiff’s invoices. 

Despite this, the contract commenced. Tricon paid the plaintiff as it was paid by the County. However, there came a time when the County stopped paying Tricon, and Tricon, in turn, stopped paying the plaintiff. 

The plaintiff sued Tricon, the County, and QBE (Tricon’s surety), alleging a breach of contract and other claims. Tricon filed a counterclaim against the plaintiff, contending that the plaintiff breached the contract by attempting to enforce prior to any duty arising on the part of Tricon to pay. The plaintiff filed a motion to dismiss Tricon’s counterclaim, and QBE cross-moved for summary judgment, arguing that under the pay-if-paid provision, neither Tricon nor QBE, as its surety, had a duty to pay the plaintiff when the County had not yet paid Tricon. 

The trial court addressed three issues. First, it addressed whether the handwritten modifications were valid and conflicted with other provisions in the purchase order. Second, it decided whether the pay-if-paid provision was applicable. Third, it determined whether the pay-if-paid provision, if applicable, was enforceable as a matter of public policy. 

After oral argument, 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 QBE’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. The court, after reviewing the law in other states on the issue, 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. 

As for the plaintiff’s handwritten terms on the purchase order, the plaintiff argued that the UCC would operate to “knock-out” the conflicting clauses and would replace gaps with other UCC provisions. The Appellate Court agreed with the trial court that the 45-day time frame to pay an invoice merely created a timetable for Tricon’s payment schedule, whereas the pay-if-paid clause established an absolute precondition to Tricon’s payment. Therefore, there was no conflict between the two payment provisions because one clause established a payment schedule while the other crated an absolute precondition to payment.

The final issue addressed by the Appellate Court was the applicability of a pay-if-paid clause should it be determined that Tricon was the cause of the County’s failure to pay. The trial court ruled that the clause was silent on the issue of fault, so, the pay-if-paid clause was enforceable. The plaintiff argued that the trial judge erred by expanding the enforceability of the pay-if-paid contract provisions to situations where the failure to bring about the condition precedent was attributable to the general contractor’s conduct. The Appellate Court found that, although the trial judge correctly found that the pay-if-paid provision was silent on the allocation of fault, there was a factual dispute as to whether the County’s nonpayment was precipitated by Tricon’s inadvertent actions, deliberate conduct, or project management. As a result of the disputed issues of material fact, summary judgment should not have been granted to QBE.

As an issue of first impression, the pay-if-paid clause will most likely become subject to more litigation, especially within the arena of fault of the parties and the applicability of such a clause. In addition, such clauses may become more detailed and complicated, such as indemnification clauses have become after Azurak, in order to fill any loophole that may exist. 

All we can do now is sit and wait. Stay tuned.

*Pauline is special counsel in our Roseland, New Jersey, office. She can be reached at 973.618.4146 or pftutelo@mdwcg.com.

 

Defense Digest, Vol. 29, No. 2, June 2023, is prepared by Marshall Dennehey to provide information on recent legal 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. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.