When a contractor and subcontractor agree that payments to the subcontractor will be conditioned on the contractor’s receipt of payment from the owner, enforcement of that condition requires unmistakable clarity of purpose to shift the risk of the owner’s nonpayment to the subcontractor. Any ambiguity on the point will be resolved against the contractor. Such was the ruling of the Cheshire County Superior Court in Denron Plumbing & HVAC, LLC v. MacMillin Company, LLC, No. 213-2019-CV-00221 (April 26, 2021), a case of first impression in New Hampshire.
MacMillin was the general contractor on an assisted living facility project in Keene for Prospect Woodward Home, and subcontracted the plumbing and mechanical portion of the project to Denron. When the owner failed to pay MacMillin for reasons unrelated to Denron’s work, Denron sued MacMillin for its money after completing its subcontract work. The parties’ subcontract contained this provision on progress payments: “Contractor shall pay Subcontractor 7 days after it receives from Owner a corresponding payment for Subcontractor’s Work . . . A condition precedent to its payment obligations is Contractor’s actual receipt of the corresponding payment from Owner.” As to final payment, the subcontract stated: “Contractor shall make final payment to Subcontractor within 7 days, or as otherwise required by the applicable law in the State of work after it receives final payment from Owner.”
The Court first distinguished two types of such provisions, labeled “pay-when-paid” and “pay-if-paid.” A “pay-when-paid” clause is a timing mechanism, providing a set number of days after receipt of payment from the owner after which payment to the subcontractor falls due – but if the owner’s payment is delayed or never arrives, the obligation to pay the subcontractor is not extinguished; it is merely suspended for a reasonable length of time. A “pay-if-paid” clause makes receipt of the owner payment a strict “condition precedent” to the subcontractor’s right to get paid – and if the owner never pays the contractor, the contractor has no obligation to pay the subcontractor.
The Denron court noted that other states deal with pay-if-paid clauses “in a variety of ways. Some void them; others require explicit language for their use; and still others enforce them strictly like any other contract provision.” In deciding to adopt the middle approach, the Denron court relied heavily on New Hampshire precedent holding that “Conditions precedent are not favored in the law, and we will not construe contracts to include them unless required by the plain language of the agreement in question.” It also noted that “subcontractors are often at the mercy of the general contractor during negotiations. With that in mind, the burden should be on the general contractor to display a clear intent.”
The court then examined the two subcontract clauses referenced above to determine whether they “clearly and unambiguously expressed an intent for Prospect-Woodward’s payment to MacMillin to serve as a condition precedent to Denron’s pay from MacMillin.” It held that the first, governing progress payments, was a pay-if-paid provision while the second, governing final payment, was a pay-when-paid provision – thereby creating an ambiguity as to which one should trump the other. It also noted that the prime contract, which conditioned the owner’s payment to MacMillin on submission of “an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner's property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied,” created a further ambiguity. Juxtaposed with the subcontract’s pay-if-paid clause, a circularity issue arises: no payment is due from the owner to MacMillin until subcontractors are paid, and no payment is due from MacMillin to its subcontractors until the owner pays.
Based on these ambiguities, the Denron court deemed the parties' subcontract to be a pay-when-paid subcontract, and struck MacMillin’s pay-if-paid defense – leaving to another day whether a reasonable time had elapsed so as to make MacMillin’s payment to Denron presently due. But the message is clear. The risk of an owner’s nonpayment falls on the general contractor unless the subcontract clearly and unambiguously requires the subcontractor to share it.
MacMillin was the general contractor on an assisted living facility project in Keene for Prospect Woodward Home, and subcontracted the plumbing and mechanical portion of the project to Denron. When the owner failed to pay MacMillin for reasons unrelated to Denron’s work, Denron sued MacMillin for its money after completing its subcontract work. The parties’ subcontract contained this provision on progress payments: “Contractor shall pay Subcontractor 7 days after it receives from Owner a corresponding payment for Subcontractor’s Work . . . A condition precedent to its payment obligations is Contractor’s actual receipt of the corresponding payment from Owner.” As to final payment, the subcontract stated: “Contractor shall make final payment to Subcontractor within 7 days, or as otherwise required by the applicable law in the State of work after it receives final payment from Owner.”
The Court first distinguished two types of such provisions, labeled “pay-when-paid” and “pay-if-paid.” A “pay-when-paid” clause is a timing mechanism, providing a set number of days after receipt of payment from the owner after which payment to the subcontractor falls due – but if the owner’s payment is delayed or never arrives, the obligation to pay the subcontractor is not extinguished; it is merely suspended for a reasonable length of time. A “pay-if-paid” clause makes receipt of the owner payment a strict “condition precedent” to the subcontractor’s right to get paid – and if the owner never pays the contractor, the contractor has no obligation to pay the subcontractor.
The Denron court noted that other states deal with pay-if-paid clauses “in a variety of ways. Some void them; others require explicit language for their use; and still others enforce them strictly like any other contract provision.” In deciding to adopt the middle approach, the Denron court relied heavily on New Hampshire precedent holding that “Conditions precedent are not favored in the law, and we will not construe contracts to include them unless required by the plain language of the agreement in question.” It also noted that “subcontractors are often at the mercy of the general contractor during negotiations. With that in mind, the burden should be on the general contractor to display a clear intent.”
The court then examined the two subcontract clauses referenced above to determine whether they “clearly and unambiguously expressed an intent for Prospect-Woodward’s payment to MacMillin to serve as a condition precedent to Denron’s pay from MacMillin.” It held that the first, governing progress payments, was a pay-if-paid provision while the second, governing final payment, was a pay-when-paid provision – thereby creating an ambiguity as to which one should trump the other. It also noted that the prime contract, which conditioned the owner’s payment to MacMillin on submission of “an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner's property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied,” created a further ambiguity. Juxtaposed with the subcontract’s pay-if-paid clause, a circularity issue arises: no payment is due from the owner to MacMillin until subcontractors are paid, and no payment is due from MacMillin to its subcontractors until the owner pays.
Based on these ambiguities, the Denron court deemed the parties' subcontract to be a pay-when-paid subcontract, and struck MacMillin’s pay-if-paid defense – leaving to another day whether a reasonable time had elapsed so as to make MacMillin’s payment to Denron presently due. But the message is clear. The risk of an owner’s nonpayment falls on the general contractor unless the subcontract clearly and unambiguously requires the subcontractor to share it.
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