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New Jersey Court Weighs In On Risk Allocating Pay If Paid Contractual Provisions For The First Time

In JPC Merger Sub LLC v. Tricon Enterprises, Inc., 2022 WL 17479912 (N.J. Super. Ct. App. Div. Dec. 7, 2022), the Appellate Division of the Superior Court of New Jersey upheld the enforceability of pay-if-paid provisions in subcontracts so long as the terms are “clear” and “unambiguous.”  Pay-if-paid provisions mean a subcontractor gets paid by the general contractor only if the owner pays the general contractor for that subcontractors work.  These provisions are meant to shift the risk of the owners nonpayment under the subcontractor from the contractor to the subcontractor.  These provisions are unenforceable in some states, enforceable as written in others, and enforceable only if the provision is clear and unambiguous in other states. Prior to this case, New Jersey had not weighed in on the issue through either statute or judicial opinion.

JPC Merger Sub LLC (“JPC”) entered into a purchase order contract with Tricon Enterprises, Inc. (“Tricon”) for materials to fulfill a public improvement contract with the County of Union, New Jersey (“the County”). The purchase order contained a pay-if-paid provision, specifying JPC would only be paid if the County paid Tricon. Upon receipt and review of the purchase order, JPC’s president made a unilateral handwritten change to include a provision requiring payment within a certain timeframe, which conflicted with the preprinted terms.

Notwithstanding the modification, performance of the contract commenced and Tricon paid JPC the amount billed in its initial invoices.  Eventually, the County stopped paying Tricon, which in turn stopped paying JPC. JPC then filed suit against Tricon, the County and Tricon’s surety, alleging breach of contract due to nonpayment.  Tricon and its surety filed a counterclaim alleging breach of contract by JPC for attempting to enforce payment in the face of the pay-if-paid provision. The trial court granted summary judgment in favor of the surety and Tricon. 

In a matter of first impression, the Court analyzed all three approaches used by other states in enforcing pay-if-paid provisions. The Court ultimately determined a prohibition of pay-if-paid provisions should come from the legislature, not the courts.  Since New Jersey has no statute to the contrary, the court held as long as the contract specifies a clear and unambiguous intent by the parties to shift the risk of nonpayment, a pay-if-paid provision is enforceable.  The Court found the allegedly conflicting handwritten insertions related to timeframe of payment were initialed by only one party to the contract and, thus, viewed only as a proposal to the contract rather than a true modification. 

This case presents a significant adjustment in the allocation of risk permitted between contractors and subcontractors in New Jersey. Both contractors and subcontractors should make an effort to know which approach to pay-if-paid provisions their state follows, and always ensure their contracts are clear and unambiguous.