By: Alexander A. Miuccio Thomas H. Welby Published: August 2008

Court Rejects Pay-When-Paid Contract Provision

Construction contracts often include a “pay-when-paid” provision where a contractor is not obligated to pay his subcontractors until he has been paid by the owner. This language attempts to shield a contractor from his payment obligations no matter why the owner has not paid him.

New York courts, however, have interpreted the contingent payment clause as one which fixes a reasonable time within which the subcontractor may be expected to wait for payment from the general contractor, rather than making payment by the owner to the general contractor a condition of payment to the subcontractor.

In the recent case of Otis Elevator Company vs. Hunt Construction Group, Inc., the pay-when-paid clause in the subcontract was raised as a defense by the general contractor.

Background

Hunt Construction Group, Inc., a general contractor, subcontracted with Otis Elevator Company for the elevator and escalator work at the Turning Stone Casino and Resort Project in Oneida County, New York. The subcontractor sued the general contractor for breach of the subcontract, and moved for summary judgment.

The general contractor argued that it had not received payment from the owner for the subcontractor’s work and that in accordance with the subcontract’s pay-when-paid provision, payment was not yet due the subcontractor. The general contractor also argued that sums were presently withheld by the owner for defective work attributable to the subcontractor. Finally, the contractor argued that the subcontractor failed to comply with the contractual notice of claim requirements of the subcontract.

The subcontractor argued that summary judgment was warranted because the general contractor had approved the subcontractor’s performance of the work. In its payment application to the owner, the general contractor had certified the subcontractor’s work as complete. Additionally, the subcontractor submitted evidence establishing that the owner had reduced the general contractor’s retainage from 10% to 5%, thereby entitling the subcontractor to a release of 5% retainage as well. Given that there was no dispute as to approval of the work or release of retainage, the subcontractor argued that summary judgment was appropriate.

The trial court awarded the subcontractor judgment in the amount of $367,003 and the general contractor appealed.

Decision

The appellate court affirmed the trial court’s decision, relying on well established case law holding that a pay-when-paid clause in its subcontract merely regulates the time of payment and does not shift the risk of owner nonpayment to the subcontractor. Accordingly, the appellate court held that the general contractor’s obligation to pay its subcontractor was not contingent on the general contractor’s receipt of payment from the owner. The court also rejected the contractor’s argument that the monies withheld by the owner for defective work was attributable to the subcontractor. The defense of the subcontractor’s alleged failure to comply with the contractual notice of claim requirements was also rejected by the court.

Comment

In New York, a pay-when-paid provision or a pay-if-paid provision will not indefinitely extend a contractor’s obligation to pay its subcontractors pending the receipt of payment from the owner. Here, the general contractor relied on the pay-when-paid provision to argue that since it had not received payment in full from the owner, it was not required to pay its subcontractor in full. Since the argument was contrary to the controlling law, and the general contractor had certified in its payment application that the subcontractor’s work as fully performed, no question of fact existed and the grant of summary judgment to the subcontractor was appropriate.

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