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.
