Tuesday, November 16, 2010

Appellate Division Reaffirms that "pay-when-paid" is void

In JC Ryan EBCO/H & G, LLC v. Lipsky Enterprises, Inc., the Appellate Division, Second Department, reaffirmed the now well established princple that a "pay-when-paid" clause in New York, which forces the subcontractor to  assume the risk that the owner will fail to pay the general contractors is "void and unenforceable as contrary to public policy" as set forth in Lien Law Secdtion 34. 

For those of you that are unfamiliar with the pay-when-paid concept, the clause usually states something along the lines of "payment to subcontractor shall not be due until general contractor receives payment from the owner and subcontractor understands that payment to the general contractor is a condition precedent to payment to the subcontractor."  There are many variations of the clause but they all generally follow those ideas. 

Note that some courts in New York have differentiated between pay-if-paid clauses and pay-when-paid clauses.  The recent cases have held that a true pay-when-paid clause is enforceable if it is merely a timing mechanism for payment and does not pass the risk of non-payment on to the subcontractor. 

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

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