A couple of years ago I blogged (#101) on “pay-if-paid” clauses, which make a general contractor’s receipt of payment from the owner a prerequisite – a “condition precedent,” in legal terms – to its obligation to pay subcontractors. The main purpose of such clauses is to shift the risk of owner nonpayment, whether due to owner insolvency or owner breach, from the contractor to the subcontractors. But while pay-if-paid clauses can take various forms and include various qualifications, many such clauses are open-ended, not confined to any particular reason for the owner’s failure to pay. When that is the case, can a general contractor avoid paying its subs if the reason for owner nonpayment is the general contractor’s own default?
JBC Merger Sub LLC v. Tricon Enterprises, Inc., 474 N.J. Super. 145, 286 A.3d 1186 (2022), didn’t think so. In that case the unpaid subcontractor successfully argued that “a pay-if-paid provision can be enforced only when the project owner’s nonpayment to the general contractor was the result of default or insolvency and not when nonpayment is due to the fault of the general contractor.” Id. at 1200. The Court relied on the general rule of contract law that “Where a promisor ‘prevents or hinders’ fulfillment of a condition which otherwise would have been fulfilled, ‘performance of the condition is excused’ and the promisor’s liability is ‘fixed’ regardless of the condition’s non-fulfillment.” Id. at 1201. (New Hampshire employs the same general rule.)
Sometimes a nonpaying owner’s claim of breach by the general contractor as an excuse for withholding money is valid, sometimes it isn’t – but either way, the general contractor must decide whether to sue or settle with the owner. Can its decision to give up money in a settlement agreement rather than litigate the owner’s claimed justification for nonpayment effectively bargain away the subcontractors’ right to payment under a pay-if-paid provision?
Quinn Construction, Inc. v. Skanska USA Building, Inc., 730 F.Supp.2d 401, 421 (E.D. Pa. 2010), didn’t think so. The pay-if-paid clause in that case was as broad as can be, providing that the subcontractor “expressly accepts the risk that it will not be paid for work performed by it in the event that Skanska, for whatever reason, is not paid by [the owner] for such Work” – yet the court concluded: “In general, courts are reluctant to enforce a conditional payment provision against an unpaid subcontractor that is not responsible for the condition giving rise to the payment defense. . . [A] settlement between an owner and a general contractor prevents the general contractor from relying on a pay-if-paid clause to deny payment to its subcontractors.”
When the reason for the Owner’s nonpayment has nothing to do with the subcontractor’s performance and everything to do with the general contractor’s separate and unrelated nonperformance, there is a basic unfairness in enforcing a pay-if-paid provision. But judicial reluctance to reach an unfair result is often in tension with judicial obligation to enforce bargains as written, and an unqualified pay-if-paid clause that recites no exceptions is hard to construe as permitting any. Unless the legislature steps in to limit enforcement of pay-if-paid provisions where the subcontractor is not at fault – as Massachusetts has done for larger projects, M.G.L. c. 149, section 29E – resolving this tension in the subcontractor’s favor means construing the unfair condition as “so far beyond the contemplation of the parties at the time they entered the contract that its enforcement would work an unconscionable hardship,” MacFarlane v. Rich, 132 N.H. 608, 617 (1989). And that is not something a subcontractor should count on. “Conditions in contracts are construed in accordance with their ordinary meaning.” In re Estate of Kelly, 130 N.H. 773, 781 (1988).
The wise subcontractor won’t leave this to chance, and will attempt to negotiate language which limits the pay-if-paid clause to situations where the owner’s failure to pay is (a) due to its insolvency; (b) in breach of its obligations under the prime contract; or (c) premised on some alleged default attributable to the subcontractor.
JBC Merger Sub LLC v. Tricon Enterprises, Inc., 474 N.J. Super. 145, 286 A.3d 1186 (2022), didn’t think so. In that case the unpaid subcontractor successfully argued that “a pay-if-paid provision can be enforced only when the project owner’s nonpayment to the general contractor was the result of default or insolvency and not when nonpayment is due to the fault of the general contractor.” Id. at 1200. The Court relied on the general rule of contract law that “Where a promisor ‘prevents or hinders’ fulfillment of a condition which otherwise would have been fulfilled, ‘performance of the condition is excused’ and the promisor’s liability is ‘fixed’ regardless of the condition’s non-fulfillment.” Id. at 1201. (New Hampshire employs the same general rule.)
Sometimes a nonpaying owner’s claim of breach by the general contractor as an excuse for withholding money is valid, sometimes it isn’t – but either way, the general contractor must decide whether to sue or settle with the owner. Can its decision to give up money in a settlement agreement rather than litigate the owner’s claimed justification for nonpayment effectively bargain away the subcontractors’ right to payment under a pay-if-paid provision?
Quinn Construction, Inc. v. Skanska USA Building, Inc., 730 F.Supp.2d 401, 421 (E.D. Pa. 2010), didn’t think so. The pay-if-paid clause in that case was as broad as can be, providing that the subcontractor “expressly accepts the risk that it will not be paid for work performed by it in the event that Skanska, for whatever reason, is not paid by [the owner] for such Work” – yet the court concluded: “In general, courts are reluctant to enforce a conditional payment provision against an unpaid subcontractor that is not responsible for the condition giving rise to the payment defense. . . [A] settlement between an owner and a general contractor prevents the general contractor from relying on a pay-if-paid clause to deny payment to its subcontractors.”
When the reason for the Owner’s nonpayment has nothing to do with the subcontractor’s performance and everything to do with the general contractor’s separate and unrelated nonperformance, there is a basic unfairness in enforcing a pay-if-paid provision. But judicial reluctance to reach an unfair result is often in tension with judicial obligation to enforce bargains as written, and an unqualified pay-if-paid clause that recites no exceptions is hard to construe as permitting any. Unless the legislature steps in to limit enforcement of pay-if-paid provisions where the subcontractor is not at fault – as Massachusetts has done for larger projects, M.G.L. c. 149, section 29E – resolving this tension in the subcontractor’s favor means construing the unfair condition as “so far beyond the contemplation of the parties at the time they entered the contract that its enforcement would work an unconscionable hardship,” MacFarlane v. Rich, 132 N.H. 608, 617 (1989). And that is not something a subcontractor should count on. “Conditions in contracts are construed in accordance with their ordinary meaning.” In re Estate of Kelly, 130 N.H. 773, 781 (1988).
The wise subcontractor won’t leave this to chance, and will attempt to negotiate language which limits the pay-if-paid clause to situations where the owner’s failure to pay is (a) due to its insolvency; (b) in breach of its obligations under the prime contract; or (c) premised on some alleged default attributable to the subcontractor.
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