New York Supreme Court Granted Summary Judgment for Subcontractor Where Contractor Attempted to Utilize Contractual “Pay-When-Paid” Provision to Unreasonably Withhold Payment from Subcontractor

A.E. Rosen Elec. Co. v. Plank, LLC, No. 07862-7, 2019 BL 113951 (Sup. Ct. Mar. 01, 2019)

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Michelle Beth Rosenberg

On March 1, 2019, the Supreme Court of New York, Albany County, granted a subcontractor’s motion for summary judgment on a payment dispute involving a “pay-when-paid” contract provision.

Defendant Plank, LLC (“Contractor”) entered into a construction contract with Dutch Village, LLC (“Owner”) to act as the general contractor for the construction of four apartment buildings (“Project”).  Thereafter, Contractor entered into a subcontract with Plaintiff A.E. Rosen Electrical, Inc. (“Subcontractor”) for electrical work on the Project.  After nine months of work on the Project, a payment dispute arose between the Owner and Contractor.  At that time, Contractor directed the Subcontractor to cease work on the Project.

Contractor argued it had no present obligation to pay the Subcontractor because the subcontract between the Contractor and Subcontractor contained a “pay-when-paid” provision requiring the Contractor to make progress payments to Subcontractor within 15 days of receiving corresponding payments from the Owner and to make final payment to Subcontractor within 30 days of receiving final payment from the Owner.

Contractor then recorded a mechanic’s lien against the subject property in the amount of $1,877,191.72 for monies owed to Contractor and ultimately the subcontractors.  Subcontractor also recorded a mechanic’s lien against the property for $117,278.00, the amount it was owed by Contractor.  Subcontractor then filed an action against Contractor for breach of contract, account stated and violation of article 3A of the Lien Law.

Subcontractor filed a motion for summary judgment against Contractor for the balance owed under the subcontract between the parties.  Contractor argued in opposition to Subcontractor’s motion for summary judgment that Contractor had no obligation to make full payment to Subcontractor because it had not received the full amount of payment from Owner for Subcontractor’s work.

Specifically, Contractor argued that the subcontract included a “pay-when-paid” provision such that it had no present obligation to pay Subcontractor because the Owner had not yet paid the Contractor.  The Court rejected this argument because the “pay-when-paid” provision was merely a timing mechanism and not a “pay-if-paid” provision.  Thus, Contractor could not utilize the provision in such a way that effectively acted as a condition precedent to its obligation to pay thereby shifting the risk of Owner’s nonpayment from Contractor to Subcontractor.  The Court noted that such provisions are void and unenforceable as they are contrary to public policy because as a practical matter, suppliers and small contractors on a large construction project need reasonably prompt payment for their work and materials in order to remain solvent and stay in business.  Furthermore, the Court reasoned that it is generally presumed that parties to a construction contract do not intend small subcontractors to wait until the determination of an extended legal dispute not concerning the subcontractors’ work.

Thus, notwithstanding the subcontract’s requirement for the Contractor to pay Subcontractor within 15 days of receiving corresponding payments from owner and to make final payment within 30 days of receiving final payment from Owner, the Contractor could not unreasonably delay its obligation to pay Subcontractor.  Moreover, the subcontract stated that “[t]he parties acknowledge this is a ‘pay when paid’ timing mechanism, and not a ‘pay if paid’ provision.”  As such, the Court held that while the provision provided for a postponement of payment, payment could only be delayed for a reasonable time after completion of the Subcontractor’s work.  The Court reasoned that Subcontractor satisfactorily completed its work over two years prior which was an unreasonable time to withhold payment.

Accordingly, the Court held that the Contractor was no longer allowed to withhold payment from Subcontractor and granted summary judgment in favor of Subcontractor.

To view the full text of the court’s decision, courtesy of Bloomberg Law, click here.