By: Alexander A. Miuccio Published: January 2016

Court Rejects Pay-When-Paid and Lien Waiver Contract Provisions

Subcontracts often contain a “pay-when-paid” provision whereby payment of the monthly requisitions or final payment for work performed will be made only after payment has been received by the general contractor from the owner. New York courts, however, interpret this contingent payment clause to mean that it only 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.

Some subcontracts also provide that a subcontractor waives its right to file a mechanic’s lien against the project or against the property being improved. New York law, however, has declared that such a waiver of lien protection is contrary to public policy and, thus, void.

In the recent case of Conviron Controlled Environments, Inc. v Arch Insurance Company, the court addressed the validity of both contract provisions.

Background

In December of 2010, the State University Construction Fund entered into a contract with Framan Mechanical, Inc. for a mechanical systems upgrade project at SUNY Stony Brook. Arch Insurance Company issued a labor and material payment bond to Framan for the project.

The following month, Framan entered into a subcontract with Conviron Controlled Environments, Inc. for the installation of 10 plant growth rooms and associated climate controls. The subcontract contained a provision providing that final payment would be made to the subcontractor either after Framan received a waiver of all claims relating to the subcontractor’s work or after Framan had received final payment from the owner for the subcontractor’s work. The contract also provided that, “to the fullest extent permitted by law”, Conviron waived its right to file a mechanic’s lien against the project or the improved property.

While Conviron attempted to show completion of its scope of work as early as February of 2013, it was undisputed that its scope of work was complete no later than September 24, 2013, when Framan acknowledged completion in a letter to the owner titled “Completion of Project—Entire Project”, in which Framan stated that “the captioned project phase has been completed in accordance with the Contract Documents and is ready for acceptance and occupancy”. Conviron also filed a mechanic’s lien against the project in the amount of $179,689.87. Because this balance still remained outstanding in March of 2014, Conviron sued Arch, Framan’s payment bond surety.

After discovery, Conviron moved for summary judgment, arguing that as its work has been accepted by Framan it was entitled to payment. In opposition, Arch argued that payment was not due under the terms of the subcontract because: 1) the owner had not given written notice of acceptance of Conviron’s scope of work; 2) the owner had not waived all of its claims relating to Conviron’s scope of work; and 3) Framan had not received final payment from the owner on account of Conviron’s scope of work. Arch also relied on the waiver of lien clause in the subcontract to argue that Conviron breached the subcontract by filing a mechanic’s lien.

Decision

The court rule in favor of Conviron, holding that the three conditions to payment cited by Arch are not true conditions precedent to payment. The court cited well settled New York law that such contingent payment provisions allow the general contractor to postpone payment only for a reasonable period of time after completion of the work. In light of Framan’s September 24, 2013 acknowledgement of the completion of Conviron’s work, the court held that its two year delay in issuing payment to Conviron was unreasonable.

Finally, as to Arch’s argument that Conviron breached the subcontract by filing a mechanic’s lien where such lien right was waived, the court noted the equally well established New York law that such provisions are void as against public policy and unenforceable.

Comment

The Conviron court applied well recognized case law to hold that the pay-when-paid provision of a subcontract cannot be used to construe a condition of payment to the subcontractor. The provision allows payment to a subcontractor to be delayed only for a reasonable time after the completion of the subcontractor’s work. While what constitutes a reasonable time is subject to court interpretation, the two years that Framan withheld payment from Conviron was clearly not reasonable. The court pointed out that if the pay-when-paid provision was literally interpreted, it “would allow the owner to delay its own performance indefinitely, to the substantial detriment of subcontractors, like Conviron, whose work the parties largely agree is complete”

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