Pay if paid and pay when paid clauses are treated differently depending on the state. Some, like Illinois, North Carolina, and Wisconsin, have statutory restrictions on such clauses, and others, like California and New York, do not enforce them on public policy grounds. In other states, however, the enforceability of a pay if paid or pay when paid clause is left up to the discretion of the court, and the specific wording of the clause. Connecticut is one of those states.
Missed Opportunities in the Connecticut Supreme Court
[quote style=”boxed” float=”left”]While the dicta in the case clearly establishes the reluctance of Connecticut courts to enforce such clauses, the case itself did not result in substantive law rendering such clauses unenforceable.[/quote] The Supreme Court of Connecticut had a golden opportunity to specifically outline the state’s stance on, and interpretation of, pay when paid clauses but failed to do so. In Blakeslee Arpaia Chapman, Inc. v. EI Constructors, Inc. (239 Conn. 708), the Supreme Court dedicated a significant amount of time to summarizing eight different arguments as to why pay when paid clauses were not enforceable but then concluded that, given the trial court’s findings, “we need not determine the enforceability of a pay-when-paid clause.” While the dicta in the case clearly establishes the reluctance of Connecticut courts to enforce such clauses, the case itself did not result in substantive law rendering such clauses unenforceable.
Pay If Paid Clauses in Connecticut
Several Connecticut trial courts have discussed pay if paid clauses, and despite a general reluctance to enforce them, will do so if the circumstances are exactly right.
One leading opinion was issued just last year by the Superior Court of Connecticut, Judicial District of Hartford in the case Sil/Carr Corp. v. Bartlett Brainard Eacott, Inc.
In that case, the property owner, Colt Gateway, L.L.C. (Colt), hired Bartlett Brainard Eacott, Inc. (Bartlett) as a general contractor on a construction project. Bartlett then subcontracted with Sil/Carr Corporation (Sil/Carr) to perform unspecified specialized work. The subcontract between Barlett and Sil/Carr contained the following provision:
Subcontractor expressly agrees that payment by the owner to the subcontractor for any work performed by the subcontractor is a condition precedent to any payment by the contractor to the subcontractor
Compare that provision with a similar provision the court quoted from the opinion in Lindade Construction, Inc. v. Continental Casualty Company (2009 WL 765501):
The subcontractor agrees that the contractor shall be under no obligation to pay the subcontractor for any work until the contractor has been paid by the owner. The payment provisions of this agreement are subject to the condition that the contractor receive, in good funds from the owner, progress payments in at least the amounts payable to the subcontractor on this project … The subcontractor expressly accepts the risk that it will not be paid for work performed by it if the contractor, for whatever reason, is not paid by the owner for such work
In Lindade, the court found that the unpaid subcontractor had clearly taken on any risk of owner nonpayment when the general contractor and subcontractor entered into the contract. Additionally, the court in Lindade distinguished between pay when paid clauses, which “merely fix a [reasonable] time for payment” and don’t dissolve the responsibility of the general contractor to pay, and pay if paid clauses, which do completely shift the risk of owner nonpayment from the contractor to the subcontractor.[quote style=”boxed” float=”right”]Generally, a pay if paid clause in Connecticut will not be determined enforceable unless it is detailed, specific, and contains exacting wording that the parties intend to shift the risk of non-payment.[/quote]
In Sil/Carr, however, the court declined to hold that a pay if paid clause provision existed like the one in Lindade. Even though the contract specifically stated that Sil/Carr wouldn’t get paid until Colt paid Bartlett, the court still found that the provision in question “did not state which party must bear the risk if Colt failed to pay or become insolvent.” Without such clear language, the provision only acted as a timing mechanism for Sil/Carr to get paid and not a situation in which Sil/Carr could receive no payment at all.
Through these cases, we see a view of pay if paid clauses similar to that of several other states. Courts have to balance the general American view of freedom of contract with a reluctance to enforce provisions in construction contracts that came about due to differences in bargaining power, and can result in detrimental effects throughout the industry. Generally, a pay if paid clause in Connecticut will not be determined enforceable unless it is detailed, specific, and contains exacting wording that the parties intend to shift the risk of non-payment.