Recently, the New Jersey Appellate Division affirmed the Superior Court\u2019s decision in Jersey Precast v. Enterprises, Inc. et al.<\/u>\u00a0 Particularly, the December 7, 2022, decision affirmed the lower court\u2019s finding that a \u201cpay-if-paid\u201d clause in a material supplier\u2019s purchase order with a general contractor was binding and enforceable. The court in Jersey Precast<\/u>, acknowledged that New Jersey has no statute or published caselaw that addresses the enforceability of \u201cpay-if-paid\u201d clauses.\u00a0 As such, the court relied upon the authorities and approaches of other jurisdictions.\u00a0 For example, various courts in other states require such a clause to include clear and unambiguous language in order to for a \u201cpay-if-paid\u201d to be enforceable.\u00a0 See<\/u> e.g.<\/u>\u00a0 Main Elec., Ltd. v. Printz Servs. Corp.,<\/u> 908 P.2d 52, 528 (Colo. 1999) (stating \u201c\u2026the relevant contract terms must unequivocally state\u00a0 that the subcontractor will be paid only if the general contract is first paid by the owner and set forth the fact that the subcontractor bears the risk of the owner\u2019s nonpayment\u201d); DEC Elec., Inc. v. Raphael Constr. Corp<\/u>., 558 So. 2d 427, 429 (Fla. 1990) (stating risk-shifting provisions of a pay-if-paid term must be clear and unambiguous or, if ambiguous, interpreted as setting a reasonable time for payment). Moreover, at the federal level pay-if-paid clauses are typically enforceable where there is express contractual language that clearly demonstrates the intention of the parties to shift the risk of payment from the contractor to the subcontractor.\u00a0 See<\/u> Fixture Specialists, Inc. v. Global Construction LLC,<\/u> 2009 WL 90431, at *4-6 (D.N.J. March 30, 2009).<\/p>\n
Using the above standards as guidance, the Appellate Division in Jersey Precast<\/u>, critically pointed out that in New Jersey freedom of contract is a “‘is a factor of importance'” within “the framework of modern commercial life.” See<\/u> Whalen v. Schoor, DePalma & Canger Grp., Inc.,<\/u> 305 N.J. Super. 501, 505-06 (App. Div. 1997). It is a “settled principle that parties bargaining at arm’s-length may generally contract as they wish.” Id<\/u>. at 505. To that end the court held that, “parties may make contractual liability dependent upon the performance of a condition precedent.” See<\/u> Duff v. Trenton Beverage Co<\/u>., 4 N.J. 595, 604 (1950). \u00a0The Appellate Division further articulated that a prohibition against the use of pay-if-paid provisions as conditions precedent in construction contracts should come from the legislature rather than the courts, and as such, 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 to not frustrate conditions precedent to their performance.<\/p>\n
Key Takeaways<\/strong><\/p>\n