Another Step Closer to Understanding Pay-When-Paid Clauses

No provision in a standard construction contract has been more debated than the requirement for the general contractor to pay its subcontractors after its receipt of payment from the owner.  In situations where the owner does not pay the general contractor, the general contractor typically argues that it has no obligation to pay the subcontractor even if the reason for the owner’s nonpayment had nothing to do with the subcontractor.  Conversely, the subcontractor argues that – when the reason for the owner’s nonpayment is not the subcontractor’s fault – the general contractor must pay the monies the subcontractor is due.  Generally, the courts have said that contract language which states that the subcontractor shall not be paid until after the general contractor’s receipt of payment from the owner merely sets forth the time for payment and does not transfer the risk of the owner’s insolvency from the general contractor to the subcontractor.  “Normally and legally, the insolvency of the owner will not defeat the claim of the subcontractor against the general contractor.”  Sil/Carr Corp. v. Bartlett, 2012 Conn. Super. LEXIS 1665 (Conn. Super. Ct. June 26, 2012).  It is, however, possible for the contractor to transfer the risk of the owner’s nonpayment to the subcontractor.  The question that has persisted is what contract language will allow the general contractor to do so.  In Connecticut, a recent Superior Court case has provided some additional insight as to the answer to that question.

In Sil/Carr Corp. v. Bartlett, the Superior Court was once again asked to determine whether a pay-when-paid provision in a construction contract could protect a general contractor from its subcontractor’s claim.  In that decision, the Superior Court acknowledged that Connecticut did not have any appellate authority on point but acknowledged that there were several Superior Court decisions that have discussed the issue.  The bottom line is that, in Connecticut, a pay-when-paid clause may provide a general contractor with protection provided that it is worded correctly.

It is generally thought that a contract which states that the general contractor’s receipt of payment from the owner is a “condition precedent” to the general contractor’s obligation to a subcontractor is sufficient for a pay-when-paid clause to be enforceable but that is not true in Connecticut.  The Superior Court first determined that the condition precedent language still required a general contractor to pay its subcontractors within a reasonable time in Titan Mechanical Contractors v. Klewin Building Co.  More recently, in Lindade Construction, Inc. v. Continental Casualty Company, the Superior Court held that the subject agreement did require the subcontractor to assume the risk of an owner default.  In Sil/Carr Corp. v. Bartlett, the Superior Court analyzed the contract language used in several cases – including Titan and Lindade – and determined that stating that the contractor’s receipt of payment from the owner is a “condition precedent” the subcontractor’s right of payment was insufficient to transfer the risk of the owner’s nonpayment to the subcontractor.  Furthermore, the Superior Court went on to state that language used in the Lindade subcontract was distinguishable from the “condition precedent” language because it made it clear that the “subcontractors clearly assumed the risk of the owner’s default under its contract with” the general contractor.  Id. 

If you should have any question as to whether the pay-when paid clause in your contract transfers risk or merely establishes a time for payment, please give me a call (203) 640-8825.

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