New York Law Review

Tag: Pay-If-Paid Clause

  • Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006): Choice of Law and Enforceability of ‘Pay-If-Paid’ Clauses

    Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006)

    New York’s public policy against “pay-if-paid” clauses in construction contracts, while strong, is not so fundamental as to override a contractual choice-of-law provision selecting the law of a state where such clauses are enforceable.

    Summary

    Welsbach Electric Corp., a Delaware subcontractor, sued MasTec North America, Inc., a Florida general contractor, for non-payment. The subcontract contained a “pay-if-paid” clause, stipulating that Welsbach would only be paid if MasTec received payment from the owner, Telergy. The contract also specified that Florida law would govern. Telergy became insolvent and failed to pay MasTec, which in turn refused to pay Welsbach. New York’s Lien Law § 34 prohibits waiving the right to file a lien. The Court of Appeals held that although New York generally prohibits “pay-if-paid” clauses, the parties’ choice of Florida law was enforceable because New York’s policy was not so fundamental as to override the parties’ contractual agreement. Sophisticated parties knowingly chose another state’s law and should be held to their bargain.

    Facts

    Telergy hired MasTec to build a fiber optic network. MasTec subcontracted the electrical work to Welsbach. The subcontract contained a “pay-if-paid” clause, making payment to Welsbach contingent on MasTec receiving payment from Telergy. The subcontract also stipulated that Florida law would govern the agreement. Telergy terminated its contract with MasTec due to insolvency, leaving MasTec unpaid. Consequently, MasTec did not pay Welsbach for the work performed. Welsbach sued MasTec for the unpaid balance.

    Procedural History

    Welsbach sued MasTec in New York. MasTec asserted affirmative defenses based on the “pay-if-paid” clause and the choice of Florida law. Welsbach moved for partial summary judgment, arguing the clause violated New York Lien Law § 34. MasTec cross-moved for leave to amend its answer. Supreme Court struck MasTec’s affirmative defenses, but 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 expressed in Lien Law § 34, is so fundamental that it overrides a contractual choice-of-law provision selecting the law of a state where such clauses are enforceable?

    Holding

    No, because New York’s public policy, while strong, is not so fundamental as to override the parties’ contractual agreement to apply Florida law, where “pay-if-paid” clauses are enforceable.

    Court’s Reasoning

    The Court acknowledged that New York generally enforces choice-of-law clauses if the chosen law has a reasonable relationship to the parties or transaction. While freedom to contract is not unlimited, courts typically only refuse to enforce agreements that are illegal or violate a fundamental principle of justice. The Court emphasized that the public policy exception is reserved for foreign laws that are “truly obnoxious” (Cooney v. Osgood Mach., 81 N.Y.2d 66, 79 (1993)).

    The Court distinguished Lien Law § 34 from other areas where a fundamental public policy would override choice of law, such as human rights or anti-discrimination laws. The Court noted the historical context of mechanics’ liens, which did not exist at common law and were initially waivable. The court emphasized that Lien Law § 34 deals with risk allocation under a construction contract and is not of the same fundamental nature as laws protecting civil rights. The Court stated that “Section 34 seeks to protect New York subcontractors from the oppressive use of bargaining power.”

    Considering that both parties were sophisticated commercial entities that knowingly and voluntarily entered into the subcontract, the Court concluded that the “pay-if-paid” clause was not “truly obnoxious” as to void the parties’ choice of law. Welsbach failed to meet the “heavy burden” of proving that applying Florida law would be offensive to a fundamental public policy of New York. The Court observed that neither party was a New York corporation, which further diminished the weight of New York’s public policy concerns in this particular case. The ruling emphasizes the importance of upholding contractual agreements between sophisticated parties even if those agreements conflict with a state’s general public policy, unless that policy is deemed truly fundamental.

  • Welsbach Electric Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006): Choice of Law and Enforceability of Pay-If-Paid Clauses

    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.