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Defense Digest

Pay-if-Paid Clause in Construction Contract Found to Be Enforceable

Defense Digest, Vol. 29, No. 2, June 2023

June 1, 2023

by Pauline F. Tutelo

Key Points:

  • New Jersey Appellate Division rules on enforceability of “pay-if-paid” provision of construction contract.
  • Court held that “pay-if-paid” provision was applicable and enforceable.
  • Nevertheless, more litigation regarding the enforceability of “pay-if-paid” provisions is likely. 

Recently, the New Jersey Appellate Division ruled on the enforceability of a “pay-if-paid” provision contained in a construction contract. See JPC Merger Sub LLC v. Tricon Enterprises, Inc., 286 A.3d 1186 (N.J. Super. App. Div. 2022). The facts of this case tell a familiar story. However, the issues they elicited were a matter of first impression to the Appellate Court. 

Briefly, the plaintiff, JPC Merger Sub, LLC d/b/a Jersey Precast, entered into a purchase order contract with Tricon, the general contractor on a project with the County of Union, for the construction of a bridge. Tricon’s purchase-order contract contained a pay-if-paid provision specifying that the plaintiff would be paid only if the County paid Tricon. Upon receipt of this purchase order, the plaintiff’s president made unilateral handwritten changes that conflicted with certain pre-printed terms, including the contract price and the payment schedule. These handwritten modifications were never agreed to by Tricon. These changes included, among other things, a provision requiring that all payments be made within 45 days of the plaintiff’s invoices. 

Despite this, the contract commenced. Tricon paid the plaintiff as it was paid by the County. However, there came a time when the County stopped paying Tricon, and Tricon, in turn, stopped paying the plaintiff. 

The plaintiff sued Tricon, the County, and QBE (Tricon’s surety), alleging a breach of contract and other claims. Tricon filed a counterclaim against the plaintiff, contending that the plaintiff breached the contract by attempting to enforce prior to any duty arising on the part of Tricon to pay. The plaintiff filed a motion to dismiss Tricon’s counterclaim, and QBE cross-moved for summary judgment, arguing that under the pay-if-paid provision, neither Tricon nor QBE, as its surety, had a duty to pay the plaintiff when the County had not yet paid Tricon. 

The trial court addressed three issues. First, it addressed whether the handwritten modifications were valid and conflicted with other provisions in the purchase order. Second, it decided whether the pay-if-paid provision was applicable. Third, it determined whether the pay-if-paid provision, if applicable, was enforceable as a matter of public policy. 

After oral argument, the trial judge concluded that the plaintiff’s handwritten modifications were unenforceable as a matter of law and that the pay-if-paid provision was applicable and enforceable. The trial court denied the plaintiff’s motion to dismiss the counterclaim and granted QBE’s motion for summary judgment. The plaintiff’s motion for reconsideration was denied, and the matter was brought before the Appellate Court on an interlocutory appeal.

The Appellate Court first noted that there is no statute or published case law governing the enforceability of a pay-if-paid contract provision. The court, after reviewing the law in other states on the issue, 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 not to frustrate conditions precedent to their performance. 

As for the plaintiff’s handwritten terms on the purchase order, the plaintiff argued that the UCC would operate to “knock-out” the conflicting clauses and would replace gaps with other UCC provisions. The Appellate Court agreed with the trial court that the 45-day time frame to pay an invoice merely created a timetable for Tricon’s payment schedule, whereas the pay-if-paid clause established an absolute precondition to Tricon’s payment. Therefore, there was no conflict between the two payment provisions because one clause established a payment schedule while the other crated an absolute precondition to payment.

The final issue addressed by the Appellate Court was the applicability of a pay-if-paid clause should it be determined that Tricon was the cause of the County’s failure to pay. The trial court ruled that the clause was silent on the issue of fault, so, the pay-if-paid clause was enforceable. The plaintiff argued that the trial judge erred by expanding the enforceability of the pay-if-paid contract provisions to situations where the failure to bring about the condition precedent was attributable to the general contractor’s conduct. The Appellate Court found that, although the trial judge correctly found that the pay-if-paid provision was silent on the allocation of fault, there was a factual dispute as to whether the County’s nonpayment was precipitated by Tricon’s inadvertent actions, deliberate conduct, or project management. As a result of the disputed issues of material fact, summary judgment should not have been granted to QBE.

As an issue of first impression, the pay-if-paid clause will most likely become subject to more litigation, especially within the arena of fault of the parties and the applicability of such a clause. In addition, such clauses may become more detailed and complicated, such as indemnification clauses have become after Azurak, in order to fill any loophole that may exist. 

All we can do now is sit and wait. Stay tuned.

*Pauline is special counsel in our Roseland, New Jersey, office. She can be reached at 973.618.4146 or pftutelo@mdwcg.com.


 

Defense Digest, Vol. 29, No. 2, June 2023, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.

Firm Highlights

Thought Leadership

Two Tracks, No Preclusion: Ohio Supreme Court Preserves Separate Damages Claims After Chapter 2506 Appeals

The Supreme Court of Ohio has clarified that an administrative appeal under Ohio Revised Code Chapter 2506 does not bar a separate action for damages and declaratory relief that could not have been pursued in the administrative appeal. The Ohio Supreme Court considered Sheetz, Inc. v. Centerville (2026-Ohio-3531) as a result of a certified question from the Southern District of Ohio. The question was whether Sheetz, the gas station/convenience store brand, was barred from seeking damages in a separate action since damages were not sought in their administrative appeal. Ultimately, the Ohio Supreme Court ruled that res judicata does not bar a separate action for damages after ruling on an administrative appeal because R.C. Chapter 2506 is limited to judicial review and cannot grant affirmative relief. The case arose after Centerville’s city council rejected a site plan proposed by Sheetz, Inc. that had received unanimous approval from the City’s planning commission. 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Further, the Court held that Grava’s conclusion that a final judgment precludes additional litigation for different relief is inapplicable under this fact pattern because it was meant only to apply to those matters in which the plaintiff brings the exact same case twice, but for new relief. The Court found Grava was inapplicable because Sheetz could have requested damages or declaratory relief in the R.C. 2506 appeal. Therefore, Grava would be nothing more than dicta if it even did apply. Going further, the Ohio Supreme Court disavowed Sixth Circuit precedent which, in reliance on Grava and other district court decisions, permitted an owner to seeking relief under 42 U.S.C. § 1983 alongside an administrative appeal. See Moore v Hiram Twp., 988 F.3d 353 (6th Cir.2021). The Ohio Supreme Court found that the Sixth Circuit had disregarded a critical decision in Community Concerned Citizens, Inc. v. Union Twp. Bd. of Zoning Appeals, 1993-Ohio-115, which clearly held that a R.C. Ch. 2506 appeal cannot be combined with a complaint seeking other claims for relief. Id. at ¶ 11. To that end, the Ohio Supreme Court has determined that the decisions Moore relied on (outside of Grava) are no longer good law, and that Moore was wrongly decided. The decision draws a clear procedural boundary: Chapter 2506 provides judicial review of an administrative decision, not a forum for independent claims seeking affirmative relief. Although Grava may place claims arising from a single transaction within the potential scope of claim preclusion, those claims are not barred unless the complete claim-preclusion test is satisfied. Because Sheetz could not have pursued damages or declaratory relief in its Chapter 2506 appeal, the separate action was not precluded. The remaining question for practitioners looking to apply or defend against this exception is when does the statute of limitations begin to run on damages and declaratory relief claims related to an administrative decision on appeal? A takings action in federal court has a 2-year statute of limitations, or as a state claim, 4 years (like the other tortious claims raised therein). Correlating this case with others, an administrative appeal will not likely toll the statute of limitations on claims based on a final decision by a municipal authority. Therefore, practitioners should look for these cases to be brought simultaneously.

Thought Leadership

Pennsylvania Supreme Court to Review Whether Legal Malpractice Claims May Be Recast as Breach of Contract Claims

The Pennsylvania Supreme Court recently granted allowance of appeal to consider whether a plaintiff may pursue a breach of contract claim against an attorney based on allegations that the attorney failed to provide competent legal services. The issue is significant in professional liability litigation because it concerns whether a plaintiff may avoid the statute of limitations applicable to professional negligence claims by characterizing the alleged misconduct as a breach of contract. Antoine Poteat retained attorneys Gary Asteak and Nino V. Tinari to represent him in a criminal matter. After his conviction was subsequently overturned through a Post Conviction Relief Act proceeding, Poteat filed suit against his former attorneys alleging that they breached their retainer agreements by failing to provide competent legal services. The attorneys argued that the claims sounded in professional negligence, rather than breach of contract, and were therefore time-barred. The trial court dismissed Poteat’s complaint, but the Superior Court, sitting en banc, reversed. The Superior Court held that the gist-of-the-action doctrine did not bar Poteat’s breach of contract claim because the alleged failure to provide competent legal services could constitute a breach of the parties’ agreement. The Court further held that a legal-services agreement contains an implied duty requiring an attorney to provide competent legal services, even where the agreement does not contain an express provision requiring such services. The Pennsylvania Supreme Court granted review in July 2026 and will consider whether the Superior Court’s decision conflicts with Pennsylvania precedent distinguishing contract and tort claims, including Bruno v. Erie Insurance Co. The Supreme Court will also address whether a plaintiff may maintain a breach of contract claim based on an implied duty to provide competent legal services without identifying a specific contractual provision that was breached. The Supreme Court’s decision could have significant implications for professional liability litigation in Pennsylvania, particularly where plaintiffs seek to characterize claims arising from alleged professional negligence as contractual claims.

Thought Leadership

The Search-Incident-to-Arrest Doctrine Does Not License Strip Searches

In Beatty v. Gardner, No. 25-2860 (3d Cir. Sept. 16, 2026), Kyle Beatty sued police officers Clinton Gardner and Calvin Irvin under 42 U.S.C. § 1983 after they stopped, arrested, and searched him three times during a drug investigation in Williamsport, Pennsylvania. The officers initially smelled marijuana coming from the car in which Beatty was sitting and observed marijuana residue, giving them probable cause to arrest him. Beatty consented to the first pat-down, and the second search was conducted incident to his lawful arrest; neither search uncovered weapons or contraband. The officers then transported Beatty to the police station solely to strip-search him, but the strip search also revealed nothing. The District Court granted the officers summary judgment, concluding that the initial stop, arrest, and first two searches were reasonable and that qualified immunity protected the officers from liability for the strip search. The Third Circuit affirmed, but held that the strip search itself violated the Fourth Amendment. The court concluded that the search-incident-to-arrest doctrine does not automatically permit officers to strip-search an arrestee outside the jail or prison setting. Because strip searches are highly intrusive and the traditional justifications for searches incident to arrest (officer safety and preservation of evidence) did not justify the search of Beatty, the officers generally needed either the arrestee’s consent, exigent circumstances, or a warrant supported by probable cause to believe that a search beneath the clothing would reveal weapons, contraband, or evidence. Here, the officers had none of those justifications. Nevertheless, the court held that qualified immunity barred damages liability because, at the time of the search, the right against a warrantless strip search of an arrestee outside the institutional setting was not clearly established by Supreme Court or Third Circuit precedent. The court likewise upheld qualified immunity on Beatty’s First Amendment retaliation claim and affirmed summary judgment for the officers.