West-Fair Electric Contractors v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148 (1995)
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A pay-when-paid provision in a subcontract that shifts the risk of the owner’s nonpayment from the general contractor to the subcontractor is void as against public policy under New York Lien Law § 34.
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Summary
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This case addresses whether a “pay-when-paid” clause in a subcontract violates New York public policy. West-Fair Electric Contractors and L.J. Coppola, Inc. (plaintiff) were subcontractors for Gilbane Building Company (general contractor) on a construction project. The subcontract contained a clause stating the general contractor’s payment obligation to the subcontractors was contingent on the owner paying the general contractor. The owner became insolvent and failed to pay the general contractor, who then refused to pay the subcontractors. The plaintiff sued the general contractor and Aetna (surety). The New York Court of Appeals held that the pay-when-paid clause was void as against public policy because it effectively waived the subcontractor’s lien rights under New York Lien Law § 34.
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Facts
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Gilbane Building Company was the general contractor for a construction project. Gilbane subcontracted with West-Fair Electric Contractors and L.J. Coppola, Inc. (plaintiffs) to perform electrical and plumbing work, respectively. Section 3.2 of the subcontract stated that payment to the subcontractor was “dependent, as a condition precedent, upon the construction manager receiving contract payments, including retainer from the owner.” Gilbane obtained a payment bond from Aetna Casualty & Surety Company. The owner of the project became insolvent and stopped paying Gilbane. Gilbane, in turn, stopped paying the subcontractors. Coppola substantially completed work by October 1993 but was not fully paid.
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Procedural History
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Plaintiff commenced an action in Federal District Court against Aetna and Gilbane, seeking the remaining sums due under the subcontract. The District Court granted summary judgment for the plaintiff, finding the pay-when-paid provision violated public policy. Defendants appealed to the Second Circuit Court of Appeals, which certified two questions to the New York Court of Appeals. The NY Court of Appeals accepted the certified questions.
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Issue(s)
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Whether a pay-when-paid provision in a subcontract, which transfers the risk of an owner’s default from a general contractor to a subcontractor, violates New York public policy as set forth in the Lien Law?
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Holding
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Yes, because a pay-when-paid provision that forces the subcontractor to assume the risk of the owner’s failure to pay violates New York Lien Law § 34, which prohibits waivers of lien rights.
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Court’s Reasoning
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The court reasoned that New York’s Lien Law is remedial and intended to protect those who directly expend labor and materials to improve real property. Lien Law § 34 states that any agreement waiving the right to file or enforce a mechanic’s lien is void as against public policy. The court distinguished the present case from Schuler-Haas Elec. Co. v Aetna Cas. & Sur. Co., 40 NY2d 883, noting that the subcontract explicitly made payment from the owner to the general contractor a