By Bruce Jervis
Pay-if-paid clauses shift the ultimate risk of project owner nonpayment from the prime contractor to a subcontractor. Owner payment for the subcontractor’s work is a condition precedent to the contractor’s obligation to pay the sub. The harsh ramifications of these clauses, and the perceived superior bargaining power of large general contractors over specialty trade contractors, have led to legislative and judicial restrictions on enforceability.
New York is one state where pay-if-paid clauses are generally unenforceable. Years ago the state’s highest court ruled that the clauses impermissibly negate subcontractor mechanic’s lien rights. But what if the subcontractor had no lien rights? In a recent case, the project had been located on Indian tribal land which was not subject to the state mechanic’s lien law. Consequently, a pay-if-paid clause was enforceable against a subcontractor.
While the enforceability of these clauses has been restricted in some jurisdictions, they are fully enforceable in others. Have you seen a reduction in the use of pay-if-paid clauses in the industry? Do you see these clauses included in contracts governed by state law which refuses to enforce them? I welcome your comments.
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