7 N.Y.3d 624 (2006)
When a contract contains a choice-of-law provision, New York courts will generally honor that provision unless the foreign law violates a fundamental public policy of New York; Lien Law § 34, which prohibits waivers of mechanics’ liens, does not represent such a fundamental public policy as to override a contractual choice of law favoring a state where “pay-if-paid” clauses are enforceable.
Summary
Welsbach Electric Corp., a subcontractor, sued MasTec North America, Inc., a general contractor, for breach of contract after the owner of a construction project became insolvent and failed to pay MasTec. The subcontract between Welsbach and MasTec contained a “pay-if-paid” clause and specified that Florida law governed the agreement. Florida law enforces pay-if-paid clauses, while New York law, under Lien Law § 34, deems such clauses void as against public policy. The New York Court of Appeals held that the choice-of-law provision should be enforced because New York’s public policy against pay-if-paid clauses, as expressed in Lien Law § 34, is not a sufficiently fundamental policy to override the parties’ contractual choice of Florida law. This decision underscores that not every difference between New York and foreign law constitutes a violation of fundamental public policy.
Facts
Telergy Metro LLC hired MasTec North America, Inc. to build a fiber optic network. MasTec then subcontracted with Welsbach Electric Corp. for electrical work. The subcontract included a “pay-if-paid” clause, making MasTec’s payment to Welsbach contingent on MasTec receiving payment from Telergy. The agreement also stated that Florida law would govern the contract. Telergy terminated its contract with MasTec due to insolvency, resulting in MasTec not being fully paid. Consequently, Welsbach was not paid for its work and sued MasTec to recover the unpaid balance.
Procedural History
Welsbach sued MasTec in New York. MasTec asserted affirmative defenses based on the pay-if-paid clause and the applicability of Florida law. The Supreme Court struck these affirmative defenses, holding that the pay-if-paid clause violated New York’s Lien Law § 34. The Appellate Division affirmed. MasTec appealed to the New York Court of Appeals.
Issue(s)
Whether New York’s public policy against “pay-if-paid” clauses, as articulated in Lien Law § 34, is so fundamental that it overrides a contractual choice-of-law provision selecting the law of a state (Florida) where such clauses are enforceable.
Holding
No, because Lien Law § 34, which deals with risk allocation in construction contracts, does not embody a public policy so fundamental as to override the parties’ contractual choice of law. Therefore, the Florida law, which enforces pay-if-paid clauses, should be applied.
Court’s Reasoning
The Court of Appeals began by acknowledging the general principle that choice-of-law provisions are enforceable if the chosen law bears a reasonable relationship to the parties or the transaction. However, this freedom is limited by the public policy exception, which allows courts to refuse enforcement of foreign laws that violate a fundamental principle of justice, good morals, or deep-rooted tradition. The court emphasized that this exception is reserved for truly obnoxious foreign laws, quoting Cooney v. Osgood Machinery, Inc., “plainly not every difference between foreign and New York law threatens our public policy. Indeed, if New York statutes or court opinions were routinely read to express fundamental policy, choice of law principles would be meaningless.”
The court examined the history and policy considerations underlying Lien Law § 34. It noted that mechanics’ liens are statutory creations, not common-law rights, and that New York courts historically enforced lien waivers. While the current version of Lien Law § 34 prohibits such waivers, the court found that this prohibition does not represent a fundamental public policy concern of the same magnitude as, for example, anti-discrimination laws. The court distinguished the case from those involving fundamental rights, stating that Lien Law § 34 deals primarily with risk allocation under a construction contract. It noted that both parties were sophisticated commercial entities who knowingly agreed to the subcontract, including the choice-of-law provision. Applying Florida law would not be “truly obnoxious” in this context. Therefore, the court concluded that Welsbach had not met the “heavy burden” of proving that applying Florida law would offend a fundamental public policy of New York.