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Vescom Structures, Inc. v. Engineered Framing Systems, Inc.

2005 WL 3196581 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTORS; CONTRACTS—“Conditional payment” clauses in construction contracts are interpreted to mean that the material or service provider will be paid in a reasonable time, not that the risk of non-payment by the owner or other responsible party falls on the unpaid provider.

A general contractor engaged a subcontractor to install a composite steel flooring system. The subcontractor ordered materials, from a supplier, on the subcontractor’s form. The payment provision read as follows: “Paid five (5) days after receipt of payment from the owner. No retainage. Vendor will be paid for all fabricated material stored off-site.” The subcontractor made one payment for the materials but never made any further payments. The material supplier sued for payment a few months after making its last delivery. About five months later, the subcontractor and the material supplier executed a letter agreement wherein the material supplier agreed to accept whatever money was paid by the general contractor if a settlement was reached and further provided that any such settlement had to be approved by the material supplier. The disputes between the subcontractor and the general contractor continued without a settlement. When the material supplier sued to get paid, the lower court held that the subcontractor was obligated to pay for the material even though it had not yet been paid by the general contractor.

On appeal, the Appellate Division was faced with two issues. First, was the subsequent agreement a “substituted contract” for the original purchase order. In order for a “second contract to supercede it and replace the first, ‘the terms of the second contract must be so inconsistent with those of the former contract that they cannot stand together.’” In this regard, the Appellate Division concurred entirely with the lower court that the terms of the substitute agreement were not consistent with the terms of the earlier purchase order and that nothing within the substitute agreement “could reasonably be read as an amendment by [the material supplier] to look solely to [the general contractor and the bonding company] about payment.” According to both the lower court and the Appellate Division, payment for the material was to be made within a reasonable period of time. Each court recognized that the purchase order contained a “conditional payment clause.” Nonetheless, according to the Court, “[t]he majority approach in considering such clauses is to interpret them as imposing a reasonable time for payment. ... A contrary interpretation places the risk of non-payment upon the subcontractor; it exposes the subcontractor to the risk of insolvency on the part of either the owner or the general contractor and also places the subcontractor at the mercy of disputes erupting between the general contractor and the owner, or disputes erupting between the general contractor and other subcontractors, leading to a delay in payment.” The Appellate Division was “hesitant to interpret the contract to that effect absent a clear indication by the subcontractor of its understanding and acceptance of the terms.” If the subcontractor in this case “intended that its obligation to pay [the material supplier] was [to be] contingent upon” being paid by the general contractor, “it should have inserted clear language to such effect.”

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