• 'To Pay' or 'Not to Pay' - Connecticut's Latest Answer to this Perplexing Question
  • September 11, 2003
  • Law Firm: Halloran & Sage LLP - Hartford Office
  • "Pay-when paid" and "pay-if-paid" clauses are often inserted by contractors into their subcontracts to protect themselves from non-payment or late payment by the owner. These clauses state that the contractor is not obligated to pay the subcontractor for work performed on the project until the owner pays the contractor for that work. Sureties are often forced to contend with these clauses when processing payment bond claims or standing in the shoes of their principal while completing the project. Several commentators and judges throughout the country have interpreted these clauses to be unenforceable for a variety of reasons.

    Our Connecticut courts are beginning to recognize the trend in the law nationally that - absent special circumstances - "pay-when-paid" clauses are unenforceable.

    In the most recent reported Connecticut decision on the issue, the Superior Court in R&L Acoustics v. Liberty Mutual Ins. Co., CV000380506S, 2001 Conn.Super. LEXIS 2854 (Sept. 27, 2001) declared that despite the "pay-when-paid" provision in the plaintiff's subcontract, the subcontractor was entitled to payment from the general contractor and its surety within a reasonable period of time.

    In R & L Acoustics, the subcontractor filed a complaint against the general contractor and its surety premised upon the assertion that it had not been paid in full for construction work performed in renovating a local YMCA. The plaintiff's subcontract contained a standard "pay-when-paid" clause. R & L Acoustics at *12 - 13 (emphasis added). The defendant, general contractor, asserted that payment was not yet due the plaintiff because it had not yet received payment from the owner.

    After analyzing Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc., 239 Conn. 708 (1997), the leading Connecticut Supreme Court case addressing "pay-when-paid" clauses, and Thomas J. Dyer Co. v. Bishop Int. Engineering Co., 303 F.2d 655 (6th Cir. 1962), a leading national case on the issue, the Superior Court in R & L Acoustics determined that the provision in question, despite its declaration that payment was a "condition precedent," was similar to the provision in Thomas J. Dyer Co., where the Sixth Circuit Court of Appeals found:

    [T]he subcontract does not refer to the possible insolvency of the owner. On the other hand, it deals with the amount, time and method of payment, which are essential provisions in every construction contract, without regard to possible insolvency. In our opinion . . . the subcontract is a reasonable provision designed to postpone payment for a reasonable period of time after the work was completed, during which time the general contractor would be afforded the opportunity of procuring from the owner the funds necessary to pay the subcontractor.

    R & L Acoustics at * 22 - 23 ("The Dyer decision has been followed by many other courts faced with similar disputes; and represents the majority view.") citing Thomas J. Dyer Co., at 661.

    Accordingly, the Superior Court in R & L Acoustics held that the "pay-when-paid" provision was unenforceable as a condition precedent and instead operated to postpone the general contractor's obligation to pay its subcontractor until a reasonable time after the plaintiff's requisition for payment. Id. at *23; see also Conn. Carpentry Corp. v. Maranba Builders, Inc., 1999 Conn.Super. LEXIS 1538 (June 8, 1999) ("pay-when-paid" clauses "require the contractor to pay the subcontractor within a reasonable time, even when the owner never pays the contractor.") citing Blakeslee Arpaia Chapman v. EI Constructors, Inc., 1995 Conn.Super. LEXIS 545 (Feb. 21, 1995).

    The Court in R&L Acoustics left open the possibility that a subcontract provision containing explicit language transferring the risk of the Owner's insolvency onto the subcontractor would be enforceable as a "pay-when-paid" clause. However, the language in the R&L Acoustics case was fairly explicit. Nonetheless, although it appears that the law in Connecticut is developing toward disfavoring the enforceability of "pay-when-paid" clauses, such clauses may be enforceable when they expressly and unequivocally transfer the risk of the Owner's insolvency to the subcontractor.