In a case of first impression, the New Jersey Appellate Division has finally formally recognized the enforceability of pay-if-paid clauses in New Jersey, so long as those clauses clearly and unambiguously establish a condition precedent to payment of the subcontractor. JPC Merger Sub LLC v. Tricon Enter., Inc., 474 N.J. Super. 145 (App. Div. 2022) (Jersey Precast).
This landmark decision should prompt New Jersey contractors and subcontractors alike to work with their attorneys to review such clauses in their existing contracts and examine their use in future agreements in light of this new precedent.
A pay-if-paid provision provides that a higher-tier contractor has no obligation to pay a lower-tier subcontractor or material supplier unless and until the higher-tier contractor receives payment for that subcontractor or material supplier’s services or materials. This condition precedent shifts the risk of non-payment from the higher-tier contractor to its subcontractor or material supplier.
Although New Jersey courts had found reason to address pay-if-paid clauses before the Appellate Division’s December 7, 2022 opinion in Jersey Precast, no New Jersey court had expressly confirmed the enforceability of pay-if-paid clauses in a published opinion. See Avon Bros. v. Tom Martin Const. Co., 2000 WL 34241102 (N.J. Super. Ct. App. Div. Aug. 30, 2000) (holding that a pay-if-paid clause is permissible if the clause appears in clear and unequivocal language in the subcontract.); A&E Constr. Co. v. Barrier Elec. Co., Inc., 2021 WL 1081499 (N.J. Super. Ct. App. Div. Mar. 22, 2021) (affirming enforceability of pay-if-paid clause in construction contract). Although courts have previously recognized the existence of pay-if-paid clauses and addressed related issues before Jersey Precast, no court had held in a published opinion that pay-if-paid clauses are enforceable, or announced the requirement that those clauses clearly and unambiguously establish a condition precedent to payment to the lower-tier subcontractor or material supplier.
This changed on December 7, 2022, when the New Jersey Appellate Division upheld a lower court’s order enforcing a pay-if-paid clause in a material supplier’s purchase order with a general contractor. (Jersey Precast, 474 N.J. Super. at 171.) There, the general contractor, Tricon, sent its material supplier, Jersey Precast, a form purchase order for prestressed steel box beams in connection with Tricon’s fulfillment of a contract with Union County. The purchase order contained Tricon’s standard terms and conditions, including a pay-if-paid clause. Although Jersey Precast provided some draft revisions to the terms and conditions, Tricon never signed the purchase order to accept those revisions. Notably, Jersey Precast did not attempt to modify the pay-if-paid provision, which provided as follows:
Vendor 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 [w]ork from the Owner . . . , the occurrence and satisfaction of which shall be a condition precedent to Tricon’s duty to remit payment.
When fulfillment of Tricon’s obligations to Union County were rendered impossible, Tricon had no need for Jersey Precast’s steel beams. Although Tricon invoiced Union County for the cost of the beams, the county refused to pay for them or accept their delivery. Shortly thereafter, Jersey Precast brought suit against Tricon for payment for the unused steel beams.
After recognizing the lack of any statutory or published caselaw governing the enforceability of pay-if-paid clauses in New Jersey, the panel recognized that several other states have found pay-if-paid clauses valid and enforceable where those clauses clearly and unequivocally transferred the risk of the owner’s non-payment from the contractor to the subcontractor. Following well-settled principles of contract interpretation, the court held that absent fraud, duress, mutual mistake, or unconscionability, the court will enforce the bargained-for terms of a signed contract negotiated among sophisticated parties because those terms are presumed to be reasonable. (Jersey Precast, 474 N.J. Super. at 164.)
After discussing case law from this and other jurisdictions explaining that industry custom generally places the risk of an owner’s nonpayment on the general contractor rather than the subcontractor, the panel held that as long as the contract on its face contains clear and unambiguous terms setting forth the parties’ intention that payment from the owner to the contractor be a condition precedent to any obligation to pay lower-tier contractors or material suppliers, pay-if paid provisions are valid and enforceable
What is more, the panel outright rejected Jersey Precast’s argument that the pay-if-paid clauses were unenforceable as against public policy on the grounds that such policy issues were better left to the Legislature.
In sum, after Jersey Precast, the law is clear; pay-if-paid clauses are valid and enforceable in New Jersey so long as they contain “clear and unequivocal language that unambiguously sets forth the parties’ intention and agreement that owner payment is a condition precedent to the general contractor’s obligation to pay the subcontractor . . . .” (Jersey Precast, 474 N.J. Super at 163.)
New Jersey contractors wishing to avail themselves of the benefits of a pay-if-paid clause should be careful to comply with these requirements.
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