Pay-if-paid provisions are often contrasted against “pay-when-paid” provisions. Pay-when-paid provisions may require payment within a specified duration but remove the upstream contractor’s payment in-full as a condition precedent. The brief discussion below will not explore pay-when-paid, no damage for delay provisions, or statutory prompt payment acts. Instead, this article serves as a primer on recent legal developments related to pay-if-paid provisions exclusively.
New York Appellate Court Enforces Pay-if-Paid Provision
In Entech
Engineering, P.C. v. Dewberry Engineers, Inc., 204 A.D.3d 467, 167 N.Y.S.3d
55 (1st Dep’t 2022), the New York Supreme Appellate Court recently upheld
enforcement of a pay-if-paid provision. In Entech, a subcontract
contained a pay-if-paid clause requiring New York City’s payment to the
engineer as a condition precedent for the engineer’s payment to the lower-tier sub.
After the sub was terminated it brought a suit seeking to recover unpaid
invoices and arguing the pay-if-paid provision violated public policy.
The lower court dismissed the action and the sub appealed. The appellate court stated the general rule in New York that if a sub has a right to file a lien, then the pay-if-paid clause is void and unenforceable. The court rejected the sub’s argument that it nevertheless had mechanics’ lien rights related after it performed home inspections. The Appellate Division affirmed the lower court’s decision to enforce the pay-if-paid provision.
New Virginia Law Bans Pay-if-Paid Provisions
Less than two
weeks after the New York appellate court’s opinion in Entech, the
Virginia General Assembly passed legislation
aimed at prohibiting pay-if-paid clauses in public and private construction
contracts. The new law generally requires any construction contract between a
GC and a sub to include a statutory payment provision. The substance of the
provision is to require payment by higher-tier contractors to lower-tier
contractors within the earlier of (i) 45 days after the subcontract work is
satisfactorily completed, or (ii) seven days after the higher tier contractor’s
receipt of payment for the subcontract work from the owner.
The new law amends
the Virginia Prompt Payment Act and elements of the Virginia wage theft statute.
The Virginia Senate enacted the bill on April 27, 2022 and the new law went
into effect on January 1, 2023. Notably, the new law does not seem to impact a
higher-tier contractor or owner’s ability to withhold payment due to
nonconforming work or a failure to adhere to other contractual terms.
There are some initial questions regarding the specific notice of withholding requirements under the new law. The law also contains penalties of 1% per month on unpaid amounts but includes a limited safe harbor for contractors who specify a lower interest rate in their subcontracts.
New Jersey Appellate Court Recognizes Pay-if-Paid
Provisions
New Jersey’s
Appellate court recently recognized
the enforceability of pay-if-paid provisions in JPC Merger Sub LLC v. Tricon
Enter., Inc., 474 N.J. Super. 145 (App. Div. 2022) (better known as Jersey
Precast). Jersey Precast appears to be the first written opinion
formally recognizing the enforceability of pay-if-paid provisions in New Jersey.
The following
language appeared in the GC’s standard terms and conditions.
Vendor understands and agrees that [GC’s] obligation to make any payment to Vendor is subject to, and shall not exist unless and until, [GC’s] receipt of payment on account of Vendor’s [w]ork from the Owner . . . , the occurrence and satisfaction of which shall be a condition precedent to [GC’s] duty to remit payment (emphasis added).
The GC
refused to accept shipment of steel beams from the plaintiff-vendor after it
became impossible for the sub to fulfill of its contractual obligations. The GC
invoiced the owner (here, Union County, New Jersey) for the unused beams. The owner
refused to pay or accept delivery.
The court’s
analysis turned on whether the provision was clear and unambiguous. The court
reasoned that in the absence of fraud or duress, sophisticated parties are free
to bargain for the terms of their contracts.
After Jersey Precast, pay-if-paid clauses appear valid and enforceable in New Jersey provided they contain “clear and unequivocal language that unambiguously sets forth the parties’ intention and agreement that owner payment is a condition precedent to the general contractor’s obligation to pay the subcontractor . . . .” (Jersey Precast, 474 N.J. Super at 163.)
Florida Allows Clear Pay-if-Paid Provisions
Florida takes an approach generally similar as New Jersey in Jersey Precast: a pay-if-paid provision is enforceable if it is clear and unambiguous. In 1978 the Supreme Court of Florida further held in Aetna Casualty & Surety Co. v. Warren Bros. Co., 355 So.2d 785 (Fla. 1978) that if any pay-if paid provision is unclear, the payor must make payment in a reasonable time. Adding express “condition precedent” language may be a logical starting point when drafting to ensure enforceability in these jurisdictions.
California and Other Jurisdictions Frown upon Pay-if-Paid
Provisions
On the other
end of the country and the spectrum, pay-if-paid clauses have been
unenforceable in California for several years. In its benchmark Wm. R.
Clarke Corporation V. Safeco Insurance Company of America decision, the
California Supreme Court ruled that pay-if-paid provisions violate public
policy and are void and unenforceable.
Other states
prohibiting pay-if-paid provisions in whole or in part include; Delaware,
Massachusetts (prohibited on large private projects), Montana, Nevada, North
Carolina, and South Carolina.
A number of other jurisdictions have yet to rule directly on the question, including; Hawaii, Maine, North Dakota, Rhode Island, and South Dakota.[1]
Conclusion
The enforceability of pay-if-paid provisions varies significantly by jurisdiction. Moreover, recent developments and new case law have led to important changes and clarifications. Many of these changes occurred over the last few months alone. Clients may be encouraged to remain cognizant of these and other developments when drafting and signing future construction contracts.
Author Patrick McKnight is an attorney in the Litigation Department of Fox Rothschild LLP. He can be reached at pmcknight@foxrothschild.com. He is a member of Fox Rothschild’s Construction Law Group.
[1] This list is the product of the author’s research.
Other commentators have compiled slightly different lists. A full 50-state breakdown
is fairly debatable and subject to various limitations.
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