What exactly is a Pay-When-Paid clause? Pay-When-Paid clauses are often found in design professional and construction contracts and are known as contingent payment clauses, meaning the payment is contingent upon another event taking place (i.e. payment from the owner to the consultant, construction manager, contractor and the like). Reading the plain language of such a clause, one would easily assume there was no obligation for a party to the prime contract to make payment to its subcontractor or subconsultant until payment from the owner was received. This delay could be never-ending and eventually lead the prime contractor to completely relieve itself from making a payment to its subcontractor or subconsultant if it never gets paid itself.
However, Pay-When-Paid clauses in New York are not intended for this purpose. Pay-When-Paid clauses do not extend payment indefinitely and cannot be used as a strategy to extinguish a party’s responsibility for making a promised payment to a third party. Rather, New York’s Pay-When-Paid clauses are intended to act as timing mechanisms so that a party can reasonably withhold or delay payment without extinguishing the responsibility to pay.
This is in direct contrast to Pay-If-Paid clauses, which make the “event” a condition precedent to payment, shifting the risk to subcontractors. For example, a Pay-If-Paid clause would allow a prime contractor to withhold payment from its subcontractor or subconsultant indefinitely. So, if the prime contractor is not paid, the subcontractor/subconsultant is not paid. However, Pay-If-Paid clauses are strictly prohibited in many states, including New York, as against public policy.
To overcome this prohibition, parties holding the prime contract with the owner often disguise Pay-If-Paid clauses as Pay-When-Paid clauses in its subcontractor or subconsultant contract by omitting a reasonable timeframe to pay the subcontractor/subconsultant, allowing the prime contractor to assert that it cannot pay its subcontractor or subconsultant “until” it has received payment from the owner. However, these clauses are rejected by New York courts.
Most recently, in A.E. Rosen Elec. Co., Inc. v. Plank LLC, a New York State court in Albany, New York rejected a general contractor’s attempt to utilize its Pay-When-Paid clause to act as a condition precedent to its obligation to pay whereby the clause merely regulated the time of payment, which was an enforceable Pay-When-Paid provision. The Court ultimately determined the general contractor’s withholding of payment to the subcontractor for two years was unreasonable.
Though Pay-If-Paid clauses are unenforceable in New York, design professionals, consultants and contractors holding the prime contract with the owner can still take advantage of Pay-When-Paid clauses by incorporating them into their subcontractor/subconsultant contracts. To be enforceable in New York, a Pay-When-Paid clause must set a reasonable time for payment to its subcontractor or subconsultant and must not make the payment from the owner a condition precedent to the subcontractor’s or subconsultant’s right to payment. Though New York courts have not defined what a “reasonable time” for payment is, case law indicates that withholding payment for a period of two or more years is unreasonable. On the other hand, New York courts have suggested a contractual provision delaying payment until the owner has accepted the project is appropriate , but again, the courts will not likely allow an unreasonable delay by the owner in accepting the project to allow the prime contractor or design professional to indefinitely delay payment to a subconsultant.
For lengthy construction projects, the time to pay can run out fast. However, Pay-When-Paid clauses can still benefit prime contractor by allotting time to reasonably delay payment to a subcontractor or subconsultant while awaiting payment from the owner. This also still allows full protection to subcontractors and subconsultants, small and large, ensuring ultimate payment for their services rendered.
[1] A.E. Rosen Elec. Co. v. Plank, LLC, 63 Misc. 3d 1207(A), 114 N.Y.S.3d 575 (N.Y. Sup. Ct. 2019), aff'd, 181 A.D.3d 1080, 120 N.Y.S.3d 220 (2020).
[2] See Superior Site Work, Inc. v. NASDI, LLC, No. 214CV01061ADSSIL, 2018 WL 3716891, at *27 (E.D.N.Y. Aug. 3, 2018; see also Power Partners MasTec, LLC v. Premier Power Renewable Energy, Inc., No. 14CV8420, 2015 WL 774714, at *2 (S.D.N.Y. Feb. 20, 2015).
[3] Maines Paper & Food Service, Inc. v. Losco Group, Inc., 36 A.D.3d 1047, 827 N.Y.S.2d 345 (3d Dept. 2007).