New Jersey Appellate Division Rules on the Enforceability of Pay-If-Paid Clauses

February 1, 2023

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On December 7, 2022, the New Jersey Appellate Division rendered an impactful decision in JPC Merger Sub, LLC v. Tricon Enters.,[1] clarifying New Jersey’s stance on pay-if-paid provisions in construction contracts. Pay-if-paid clauses are provisions often included in construction contracts. These clauses create a condition requiring payment from a property owner to a general contractor before the general contractor must pay a subcontractor or supplier. Jurisdictions throughout the United States have taken various approaches regarding the enforceability of pay-if-paid clauses, applying differing standards or even declaring them unenforceable by statute. New Jersey, however, lacked any statute or published case law governing the enforceability of pay-if-paid provisions.

In JPC Merger Sub, LLC, the New Jersey Appellate Division resolved that deficiency. There, as a part of a bridge replacement project for Union County, a general contractor executed a materials purchase order agreement with a subcontractor to supply box beams. The agreement included a pay-if-paid clause stating,

Vendor understands and agrees that [the general contractor’s] obligation to make any payment to Vendor is subject to, and shall not exist unless and until, [the general contractor’s] receipt of payment on account of Vendor’s [w]ork from the [property] Owner . . . the occurrence and satisfaction of which shall be a condition precedent to [the general contractor’s] duty to remit payment.

The general contractor made initial payments to the subcontractor but stopped when the project reached a standstill. Specifically, the general contractor alleged it could not use the subcontractor’s beams because their intended location was dangerously close to high-voltage power lines and that, although it submitted an invoice to the County for the beams, the County refused to pay. Thus, the general contractor claimed the pay-if-paid clause eliminated its responsibility to pay the subcontractor.

After the subcontractor filed suit, the trial court dismissed its claims on summary judgment, finding that the pay-if-paid clause absolved the general contractor of its obligation to pay the subcontractor. On appeal, the Appellate Division reversed the grant of summary judgment, holding that pay-if-paid clauses are enforceable if set forth clearly and unambiguously. It specified, however, that the enforceability of such clauses remains subject to the implied duty not to frustrate the occurrence of conditions precedent. 

Applying that standard to the case, the Court first concluded that the pay-if-paid clause in the purchase order agreement was clear, unambiguous, and, therefore, valid as written. It reversed, however, due to an issue of fact as to whether the general contractor frustrated the occurrence of the condition precedent. Specifically, the Court found a material issue existed regarding whether the County’s refusal to pay for the beams was the result of the general contractor mismanaging the project by failing to conduct due diligence and coordinate with utility companies. 

The decision in JPC Merger Sub, LLC has two essential takeaways regarding the enforceability of pay-if-paid clauses. First, pay-if-paid clauses are valid, provided they are clear and unambiguous. Second, if a contractor is responsible for a property owner or upstream party’s lack of payment, a valid pay-if-paid clause will not eliminate its obligation to pay a subcontractor because of the implied duty not to frustrate conditions precedent to performance. 

It is also important to note that this decision created a divergence between New Jersey and New York law regarding the enforceability of pay-if-paid clauses. Under New York case law, pay-if-paid clauses are unenforceable as contrary to public policy.[2] New York courts will, however, enforce pay-when-paid clauses, which use upstream payments to determine the time when a subcontractor must be paid, rather than creating a condition precedent for the subcontractor’s right to receive payment. As such, it is crucial to understand which state’s law will apply in contracts featuring pay-if-paid clauses.

[1] No. A-2893-21, 2022 N.J. Super. LEXIS 140 (App. Div. Dec. 7, 2022)

[2] West-Fair Elec. Contractors v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 158 (1995).

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