Although relatively common, pay-if-paid clauses are a significant point of contention in the construction industry. A subcontractor accepting the risk of the owner’s nonpayment is, well…risky. Due to the significant effect these clauses can have on a subcontractor’s right to payment, many states have declared them void, or limited the enforceability.
New Hampshire’s case law had yet to fully tackle the issue — until recently when the Cheshire Court Superior Court finally made New Hampshire’s stance clear that pay-if-paid clauses are enforceable, but only if the clause expresses a clear and unambiguous intent to create a condition precedent to payment.
Contingent payment clauses
There are two types of contingent payment clauses: pay-if-paid and pay-when-paid clauses. The difference between the two — besides one word — is considerable.
A pay-if-paid clause creates a condition precedent before the contractor is required to pay. In other words, there is no obligation to pay unless the condition (a receipt of payment) is met. On the other hand, pay-when-paid clauses are merely a timing mechanism. The obligation to pay remains, and is required to be made within a reasonable timeframe.
Each state handles the enforceability of these clauses in its own way, which is why it’s important to understand how they are treated where you’re working.
Neither the New Hampshire Supreme Court nor its Superior Courts had fully discussed the topic in detail — until now.
New Hampshire Superior Court weighs in on contingent payment clause
The case in question is Denron Plumbing & HVAC LLC v. MacMillin Company, LLC, et al.
- Owner: Prospect-Woodward Home (Prospect)
- General Contractor: MacMillin Company, LLC (MacMillin)
- Subcontractor: Denron Plumbing & HVAC, LLC (Denron)
Woodward had hired MacMillin as a general contractor for the construction of an assisted living facility. In turn, Denron was hired as a subcontractor to perform plumbing and mechanical work on the project. As Denron neared completion of their work, MacMillin requested payment from Woodward, who refused. MacMillin then refused to pay Denron.
Denron subsequently filed suit under claims of breach of contract and unjust enrichment. MacMillin answered with several affirmative defenses, one of which was that they weren’t obligated to pay until they were paid by Prospect pursuant to the payment terms of the contract. Denron moved to strike this defense.
Payment provisions at issue
The subcontract between MacMillin and Denron contained the following payment provisions:
Section 9.2B: Progress Payments
“Contractor shall pay Subcontractor 7 days after it receives from Owner a corresponding payment for Subcontractor’s Work. Payment terms between the Owner and Contractor including the dates upon which payment is due to the Contractor from the Owner are set forth in Section 12 of the Project Agreement. A condition precedent to its payment obligations is Contractor’s actual receipt of the corresponding payment from Owner.”
Sec. 9.4: Final Payment
“[C]ontractor shall make final payment to Subcontractor within 7 days, or as otherwise required by the applicable law in the State of work after it receives final payment from Owner.”
Incorporation of the prime contract
“Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner’s property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.”
Denron’s arguments were twofold:
- The claim was for final payment, which should be covered under Sec. 9.4, which is a pay-when-paid clause.
- The incorporation of the prime contract creates an ambiguity that invalidates the pay-if-paid clause under Sec. 9.2B.
Court decides to follow the majority approach
Since the topic of contingent payment clauses had yet to be discussed by neither the NH Supreme Court nor any Superior Courts, the court looked to the approaches of other jurisdictions.
The court identified a few:
- States where they are void according to statute (such as North Carolina, Wisconsin, and South Carolina)
- States where they are void according to case law (such as New York and California)
- States where they are enforceable, but can’t be used as a defense to mechanics liens (such as Illinois, Missouri, and Maryland)
- States where they are enforceable only if the language is clear and unambiguous (such as Tennessee, Kentucky, and Indiana)
- States where they are enforceable “even in the face of minor language” (such as Georgia)
After a rather thorough examination, the court ultimately agreed with the majority approach: Pay-if-paid clauses are enforceable, but only if the language is clear and unambiguous.
Are the clauses ambiguous?
Now that the court established its stance on such clauses, it began its analysis.
Do these provisions, reading the document as a whole, show a clear and unambiguous intent to establish a condition precedent for payment?
First, the court read Sec. 9.2B (progress payments) as a pay-if-paid clause. It clearly states that “[a] condition precedent to its payment obligations is Contractor’s actual receipt of the corresponding payment from Owner.”
Second, Sec. 9.4 (final payment) was determined to be a pay-when-paid clause, which is only a timing mechanism to payment.
However, when read together, an ambiguity arises. The contract doesn’t specify what would happen if Denron applied for final payment, but had yet to receive progress payment. So, which clause would apply?
The court also found another ambiguity in regards to the incorporation clause: The prime contract requires MacMillin to submit an affidavit that payrolls were paid before they could receive payment from Prospect.
Thus, due to these ambiguities, the court granted Denron’s motion to strike the pay-if-paid clause defense.
Pay-if-paid clauses are enforceable in New Hampshire
This decision brings some welcome insight into how the clauses will be handled in New Hampshire. Frank Spinella, the attorney of record for Denron, had this to say in a recent blog post:
“[T]he message is clear. The right of an owner’s nonpayment falls on the general contractor unless the subcontract clearly and unambiguously requires the subcontractor to share it.”
To take it a step further, even if the clause itself is clearly stated, it will be read in context with the other provisions in the contract. Any conflicts that cause ambiguity could jeopardize the enforceability of the clause, which is important to understand from both a general contractor standpoint and a subcontractor standpoint.
So, read your contracts! Thoroughly, and carefully.