Court gives lesson to subcontractors: when your contract incorporates the terms of the prime contract READ IT

In CNP Mech. Inc. v. Allied Bldrs. Inc. the Appellate Division reduced a trial verdict that had been rendered in favor of a subcontractor and against a prime contractor.  While the trial judge awarded the subcontractor the full value of the change orders it submitted, the Appellate Division reduced the amounts of the award.  The reason behind the reduction was that the subcontract stated that it incorporated the terms of the prime contract between the owner and the prime contractor.  The prime contract contained a clause stating that the owner only had to pay for change orders in the amount approved by the owner.  Since the owner did not approve the full amount of the change orders related to the subcontractor’s work, the general contractor was not required to pay the full value to the subcontractor.  Rather, the Appellate Division held, the general contractor only had to pay the subcontractor the value that was approved by the owner.

Another interesting aspect of this case is that while the trial court awarded interest from the time the task was performed, the Appellate Division pointed out that the subcontract contained a valid “pay when paid” clause and, therefore, determined that the interest ran not from the time of performance but, pursuant to the contract, 15 days from the time that the general/prime contractor received payment from the owner.

It is important to note the difference between a “pay if paid” contract, which is void in New York, and a “pay when paid contract”, which is enforceable in New York.  Essentially the “pay if paid” provision shifts the risk of non-payment to the subcontractor.  If the general contractor is not paid, the general contractor is allowed to not pay the subcontractor.  A “pay when paid” provision on the other hand has been determined to be simply a timing mechanism for payment.  So, as in this case, it simply sets the time when payment becomes due.  Here, payment was due within 15 days of receipt of payment from the owner.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com

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