Sometimes, it seems as if determining whether pay if paid clauses and/or pay when paid clauses are enforceable in a certain state is nearly impossible. In many states, the question is only resolved by an analysis of the specific language of the individual clause itself, a labor intensive proceeding that, almost invariably, leads to confusion about what constitutes language that is “clear enough”. Fortunately, however, in Delaware the answer to at least one of those questions is much more straightforward.
Pay If Paid Clauses in Delaware Contracts
The simple answer is this: Pay if paid clauses contained in private (commercial?) construction contracts in Delaware are unenforceable by statute. Del. Code Ann. Title 6 Sec. 3507(e) states that shifting the risk of owner non-payment:
shall be against public policy and shall be void and unenforceable
This is a refreshing change from what we have been used to seeing. Not only is there a clear answer, it is a clear answer written directly into the state laws. But, it turns out, the answer is not as clear-cut as it first appears.
Unfortunately, however, even with this specific statutory prohibition of pay if paid clauses, some might still squeak by. Note that the code section relates to private construction contracts. Del. Code Ann. Title 6 Sec. 3507(f) states that the above provision holding pay if paid clauses unenforceable as against public policy does not apply to “Public works contracts”, “the erection of 6 or fewer residential units which are under construction simultaneously, or for the alteration or repair of any single residential unit”.
This does not mean that every pay if paid clause contained in a contract governing the above scenarios is invariably allowed, nor does it mean that any pay if pay clause will necessarily be allowed. Unfortunately, there is a lack of jurisprudence regarding pay if paid clauses in contracts where such a clause is not specifically prohibited by statute. Out of an abundance of caution, parties on these types of construction projects should be extremely wary of pay if paid clauses, especially if they are unambiguously written, on the chance that a court holds it to be enforceable.
Pay When Paid Clauses in Delaware Contracts
Pay when paid clauses that merely work as timing mechanism for payment, rather than as a risk-shifting device, are likely enforceable. The pay when paid clause in Delaware seems to be enforceable to the extent that they require payment to be made within a reasonable time following the completion of the work. However, it is worth considering that the 2010 opinion in McAnulla Electrical Electrical Construction, Inc v. Radius Technologies, L.L.C. issued by the Superior Court of Delaware, New Castle County, held that “pay when paid provision [a]re subject to varying interpretations.”
Further confusing the issue is that any decision regarding the validity of pay when paid clauses in private contracts is hard to find after the passage of Del. Code Ann. Title 6 Sec. 3507(e). While not specifically focused on clauses that do not directly attempt to shift the risk of owner non-payment, it may still serve to cool the court’s response to any similar contract clause.