In our last column we looked at a case that determined the “pay-if-paid” language in a contract between a general contractor (GC) and its subcontractor was unenforceable. Accordingly, the GC, unpaid by the project owner, had to pay the subcontractor for the work that it performed.

We noted, however, that this case was determined under the laws of New York state, and the outcome may have been different in another state. Coincidentally, the day after I submitted the last column to the editors at FCNews, another case came across my desk right on point to this discussion.

The case itself concerned a construction project, also in the state of New York. However, the GC was a Florida corporation and subcontractor based in Delaware.

The contract in question stated that upon property owner’s acceptance of the subcontractor’s work, it would be paid according to the pricing schedule contained in the contract “provided that all payments to subcontractor by contractor are expressly contingent upon and subject to receipt of payment for the work by contractor from owner.”

Despite the well settled public policy against pay-if-paid clauses in New York, the GC defended the lawsuit upon the basis of it, along with the fact that the contract being sued upon in the state’s court also contained a clause whereby the parties agreed that the law of Florida, the GC’s home state, would govern their contract. Unlike New York, Florida law allows pay-if-paid contracts.

The first judge determined the underlying public policy of New York disfavoring this type of contract clause overrode the Florida choice of law provision in the contract, and so, dismissed the pay-if-paid defense of the GC. The GC appealed this decision to New York’s intermediate Appellate Court, which agreed the trial court was correct in dismissing the defense. It did, however, allow the GC to bring its case to New York’s highest court.

This court, faced with the question of whether to apply New York Law, allowing the subcontractor to collect its money, or to apply Florida Law, thus allowing the pay if paid defense, stated the following: “[The New York Law] seeks to protect New York subcontractors from the oppressive use of bargaining power: here neither party is a New York corporation (and) both are sophisticated commercial entities that knowingly and voluntarily entered into the subcontract. Considering these factors and given the checkered history of pay-if-paid clauses in the construction industry, we cannot say they are truly obnoxious so as to void the party’s choice of law. In short, (the subcontractor) has not sustained its heavy burden of proving the application of Florida Law would be offensive to a fundamental public policy of New York.”

Under this decision then, the GC’s pay-if-paid contract clause was held to be a valid defense against this subcontractor’s lawsuit.

As an aside, after this case was initially brought, New York state passed a law that applies only to contracts entered into after Jan. 14, 2003. This law specifically states that a provision in a construction contract that makes the contract subject to the laws of another state, or that requires any litigation, arbitration or other dispute resolution arising from the contract to be conducted in another state, void and unenforceable. This also makes unenforceable any construction contract clause that forbids a subcontractor from suspending performance if he is not timely paid by the contractor or owner.

Bottom line: Investigate before you sign a contract that allows for a GC to avoid payment if he does not get paid.