By Bill Wilson of Robinson+Cole
Published August 31, 2022
The recent Connecticut Appellate Court decision in Electrical Contractors, Inc. v. 50 Morgan Hospitality Group, LLC, 211 Conn. App. 724 (2022), eliminated any remaining doubt regarding a subcontractor’s right to payment for work performed when the subcontract includes a “pay-if-paid” provision. A pay-if- paid provision that makes an owner’s payment to the general contractor (GC) a condition precedent to the GC’s payment to a subcontractor excuses the GC from paying its subcontractor until it actually receives payment from the owner. If the owner doesn’t ever pay the GC, the condition is not fulfilled, and the subcontractor’s right to payment, never arises.
The payment provision in this subcontract was short and simple. It provided: “[T]he [subcontractor] expressly agrees that payment by [owner] to [GC] is a condition precedent to [GC’s] obligation to make partial or final payment to [subcontractor]…” The Appellate Court found this language to be clear and unambiguous and affirmed the lower court’s summary judgment order as a matter of law. Whether such provision is fair or reasonable does not matter so long as both parties are sophisticated business entities and the contract is not voidable on grounds such as mistake, fraud, unconscionability, or violative of public policy, none of which applied here. A court will generally enforce the contract as written and not introduce new terms to which the parties did not agree.
Prior to this decision, several lower superior court decisions generally interpreted a similar payment provision including the term “condition precedent” alone, without any additional express risk-shifting language, such as a “pay-when-paid” provision, which simply postponed the GC’s payment obligation for a “reasonable” time. Payment was still due the subcontractor at some point, without regard to whether the owner ever paid the GC. However, these lower court decisions are not binding on any other courts and the Appellate Court firmly shut the door on any such equitable interpretations.
Subcontractors usually have little bargaining power when negotiating the terms of a subcontract; GC’s typically include pay-if-paid language in their subcontracts. Subcontractors are left to either accept the risk of non-payment by the owner, a party with whom it has no contractual relationship, or not take the job. The only hope at this point for more equitable subcontracts in Connecticut will be through legislative action prohibiting the use of pay-if-paid provisions in construction contracts.
First published at Construction Law Zone.
Bill Wilson is Counsel with Robinson+Cole and has more than 20 years of experience representing and counseling municipalities, public and private owners, quasi-public agencies, developers, design professionals, architects and engineers, suppliers, contractors and subcontractors in the areas of construction and commercial law. He can be reached at firstname.lastname@example.org or 860.275.8241.