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Fixture Specialists, Inc. v. Global Construction, LLC

2009 WL 904031 (U.S. Dist. Ct. D. N.J. 2009) (Unpublished)

CONTRACTORS; SUBCONTRACTORS; “PAY-WHEN-PAID” CLAUSES — Under New Jersey law, a determination as to whether a “pay-when-paid” clause is a condition precedent to payment or just a provision affording the general contractor a reasonable time to procure, from the project owner, the funds necessary to pay the contractor, is accomplished by looking at the terms of the contract between the parties and, in New Jersey, the parties are free to shift the risk of a project owner’s non-payment to subcontractors by the inclusion of such clauses in their contracts.

A general contractor subcontracted part of a housing project to a plumbing subcontractor. In connection with the project, a surety issued a labor and material payment bond to the general contractor. The subcontract contained a “Pay-When-Paid” clause. After the subcontractor had completed its work, it sought to be paid the balance owed to it by the general contractor. The general contractor refused to pay because it had not been fully paid by the owner for the project. The subcontractor sued the general contractor and the surety.

The United States District Court upheld the validity of the “Pay-When-Paid” clause and permitted the surety to use the same clause as a defense to nonpayment. It noted that courts have not uniformly construed “pay-when-paid” clauses. The Court found that, under New Jersey law, a determination as to whether such a clause is a condition precedent to payment or just a provision affording a general contractor a reasonable time to procure from the owner the funds necessary to pay its subcontractor is accomplished by looking at the terms of the contract between the parties. If there is no express provision shifting the risk to the subcontractor, the clause is seen as a timing provision only. Here, the Court found that the payment clause specifically stated that the subcontractor agreed that the contractor shall never be obligated to pay it under any circumstances, unless and until funds are in hand and it has been paid in full. The clause also expressly stated that the clause shall not be construed as a time of payment clause. So, it held that such language unequivocally established a condition precedent notwithstanding New Jersey’s public policy of providing greater protection to subcontractors.

Further, the Court ruled that New Jersey courts have held that parties are free to shift the risk to subcontractors by the inclusion of such clauses in their contracts. It rejected two out-of-state authorities that held that pay-if-paid provisions are contrary to public policy and thus unenforceable because they affect an impermissible indirect waiver of the subcontractor’s protected mechanic’s lien rights in the event of non-payment by the owner. It found that New Jersey courts have held that even if payment was not technically due under the contract, a claimant could file its lien against the owner’s property to protect its interest. Therefore, the Court held that the subcontractor’s remedies would not be waived. It also agreed that the surety could assert all of the defenses available to its principal based on the provisions contained in the surety bond which stated that the subcontractor was entitled to be paid only if the contractor owed it sums “justly due.” The Court found no New Jersey authority on this point, but relied on an out-of-state opinion which concurred with its opinion that the surety “steps into the shoes” of the contractor under the facts presented herein.

In attempting to predict how New Jersey state courts would decide the issue, the Court noted that New Jersey common law upheld the propositions that: (1) a principal and its surety are equally and primarily liable in case of a breach of a bond’s conditions; and (2) a surety is not liable on the surety contract if its principal has not incurred liability on the primary contract. Thus, the Court believed that New Jersey courts would find liability only if the contractor’s debt matured.


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