Chart with Owner, General Contractor, and Subcontractor all connected with question mark between relationships and Connecticut state label

Pay-if-paid clauses in construction contracts are controversial at best. While some states have enacted legislation strictly prohibiting the enforceability of such clauses, other states will still enforce them if the language and intent are clear. Connecticut is one such state, and a recent Appellate Court decision serves as a reminder of this to subs and suppliers.

Pay-if-paid clauses in Connecticut

When it comes to pay-if-paid clauses, in the states where they are enforceable, the courts will typically require “clear and unambiguous” language that shows the intent of the parties to shift the risk of owner nonpayment from the GC to the subcontractor.

We’ve covered the enforceability of pay-if-paid clauses in Connecticut a few years back — but a recent court decision has offered a warning to subs and suppliers working in CT that pay-if-paid clauses are alive and well in the Constitution State.

Unpaid sub claims the payment provision is a pay-when-paid, not a pay-if-paid clause

The case in question is Electrical Contractors, Inc. v. 50 Morgan Hospitality Group, LLC, et al.

Project Snapshot:

In early 2017, 50 Morgan had hired Greython as a general contractor for a renovation project, and ECI was brought on as a subcontractor by Greython to perform the electrical work. The subcontract between the parties included the following provision, under Article 6:

“[ECI] shall submit to [Greython] a requisition, on forms provided by [Greython] . . . . Partial payments shall be due following receipt of payment [from] [50 Morgan] to [Greython] in the amount of 95 [percent] of the material in place for which payment has been made to [Greython] by [50 Morgan]. [ECI] expressly agrees that payment by [50 Morgan] to [Greython] is a condition precedent to [Greython’s] obligation to make partial or final payments to [ECI] as provided in this paragraph…”

When ECI had completed the work, Greython failed to make final payment (a little over $350,000). Greython claimed that an invoice had been submitted, but 50 Morgan had been waiting on a loan closing before they could make any more payments — which never happened. Accordingly, ECI filed a lawsuit seeking to recover $350,616.65, plus attorney fees, accrued interest, and costs.

At trial, Greython filed a motion for summary judgment, which argued that Article 6 of the subcontract clearly and unambiguously stated that they weren’t obligated to pay ECI until it received payment from 50 Morgan. The court granted the motion, and ECI promptly appealed.

The words ‘condition precedent’ seals the deal when it comes to pay-if-paid clauses

On appeal, ECI argued the trial court had incorrectly interpreted article 6 as a “pay-if-paid” clause, claiming the proper interpretation was that the provision was a “pay-when-paid” clause — which merely postpones a GC’s obligation to pay its subs for a reasonable period of time, as opposed to creating a condition precedent to payment.

Although pay-if-paid clauses are disfavored in Connecticut, the court must rely on the plain language of the contract. In the provision in question, the clause specifically states that payment by 50 Morgan to the Greython was a condition precedent to Greython’s obligation to make partial or final payments to ECI.

The court went on to define “condition precedent,” which is “a fact or event which the parties intend must exist or take place before there is a right to performance…If the condition is not fulfilled, the right to enforce the contract does not come into existence.”

Given the clear and unambiguous language of the clause, the court determined that the provision was in fact, a pay-if-paid clause:

“In any construction project, there is a risk that an owner will become insolvent and therefore be unable to pay its general contractor. The plaintiff in the present case is a sophisticated construction company. It could have added language to the contract specifying that Greython’s duty to pay would be postponed only temporarily if Greython did not receive payment from 50 Morgan. Instead, the plaintiff now asks this court to write such clarifying language into the contract. We are not inclined to make a new and different agreement by adding terms to which the plaintiff and Greython did not agree. Furthermore, as the court noted in its memorandum of decision, our conclusion ‘‘[does not] change the [plaintiff’s] right to be paid any time Greython gets paid in the future. It just means that not having been paid by [50 Morgan], Greython’s failure to pay the [plaintiff] now [does not] breach the express contract language.”

Always review your contract terms — specifically the payment provisions

As this case, and many others, note, “A contract… however, does not violate public policy just because the contract was made unwisely. …” 

Signing a construction contract without thoroughly reviewing the terms is, indeed, unwise. Keep in mind that there are a number of clauses that subs and suppliers should keep an eye out for. But when it affects payment, such as pay-if-paid clauses, it’s important to be extra vigilant.

Granted, very specific language is required to shift the risk of nonpayment to a subcontractor, but when the words are there, savvy subs and suppliers should attempt to negotiate different terms — or they may find themselves with little to no options if they ultimately go unpaid.

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