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1 PAY IF PAID CLAUSES A Presentation by: And Brought to You by:

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1 1 PAY IF PAID CLAUSES A Presentation by: And Brought to You by:

2 2 PRESENTER BIOGRAPHY John Morris, Esq. practices law with the New Jersey law firm of McElroy, Deutsch Mulvaney and Carpenter, LLC. Mr. Morris is admitted to the bars of New York, Pennsylvania and New Jersey and United States District Courts of New Jersey and the Southern and Eastern Districts of New York. He practices in the area of construction, contract/surety, professional-liability defense and commercial litigation. Most of these cases, but not all are concentrated in the engineering, procurement and construction industries. He co-authored The Suretys Environmental Risk, a Monograph published by the American Bar Association in 1996, which analyzes the risks associated with underwriting contract surety bonds for response-action contractors performing environmental remedial work at projects listed on the National Priorities List.

3 3 James Rudnik, Esq. began his surety career in Minnesota as a surety exclusive agent in After law school he practiced law representing sureties and contractors until he joined the surety and fidelity claim department at the St. Paul Fire and Marine Insurance Company. He was the claim manager for Allstate Reinsurance which he notes was like a post graduate course in surety company finance and management. He planned and built the surety claim department for the then fledgling Liberty Mutual Surety. For the past ten years he has been a surety claims consultant where his clients include surety companies and reinsurers. He has previously been the claims instructor for the William J. Angell Surety School. Mr. Rudnik is admitted to the bars of Minnesota and Illinois. His surety agency business, Rudnik Surety, Inc., is now owned by his brother, David Rudnik. PRESENTER BIOGRAPHY


5 5 HISTORICAL PERSPECTIVE A. Origination of Pay When Paid Clauses B. Purpose of Pay When Paid Clauses C. Case Law Development D. Legislation Proscribing Clauses E. Development of and Need for Pay If Paid Clauses

6 6 IDENTIFICATION OF PAY IF PAID CLAUSES A. Requisite Language 1. For Example: Contractors Receipt of Payment is a Condition Precedent…. 2. But Not: Contractor Shall Pay Subcontractor within Seven Days of Payment by Owner…. B. Risk/Burden Shifting C. Inability to Absorb Owner Non-Payment D. Condition Precedent – Express Language E. Cases Holding Unenforceable when Clauses Infringe on Statutory Lien Rights

7 7 Contractor's receipt of payment from the owner is a condition precedent to contractor's obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner's nonpayment and the subcontract price includes this risk. The obligation of contractor to make payment under this agreement, whether a progress or final payment, or for extra or change orders or delays to the work, is subject to the express condition precedent of payment therefore by the owner. TYPICAL PAY IF PAID CLAUSES

8 8 It is agreed that as a condition precedent to any payment by Contractor to Subcontractor hereunder, the Contractor must first receive payment from the Owner for the work of Subcontractor for which payment is sought. Subcontractor specifically agrees that it is relying on the Owner's credit for payment. Subcontractor specifically accepts the risk of non payment by Owner. TYPICAL PAY IF PAID CLAUSES

9 9 DISTINGUISHING FROM PAY WHEN PAID CLAUSES A. Purpose of Differentiating B. Timing Mechanism C. Common Traps D. State Law and Public Policy

10 10 TYPICAL PAY WHEN PAID CLAUSES Contractor shall pay Subcontractor within seven days of Contractor's receipt of payment from the Owner. "The total price paid to Subcontractor shall be the Contract Price, no part of which shall be paid until 5 days after payment is received from Owner." "The Contractor shall pay the Subcontractor each progress payment and final payment... within three working days after he receives payment from the Owner...."

11 11 ENFORCEABILITY & SHIELD FOR SURETIES A. Miller Act – Federal Cases B. State Law 1. Cases Holding Surety May Not Assert Clause as Defense 2. Cases Holding Surety May Assert Principals Defense Based on Clause C. Contradictory Language Between Bond and Subcontract Forms D. Owner Approval Triggering Timing of Payment

12 12 FIXTURE SPECIALISTS, INC. V. GLOBAL CONSTRUCTION, LLC, 2009 WL (D.N.J. 2009) FACTS: Subcontractor sued a general contractor and its surety for unpaid amounts on a private construction project in New Jersey. General contractor and its surety, relying on conditional payment provision in subcontract, refused to pay the subcontractor because general contractor had not been fully paid by the owner.

13 13 Subcontractor moved for summary judgment on two grounds: (1) that a conditional payment provision in its subcontract was not enforceable under New Jersey law; and, (2) that the payment bond surety could not, in any event, rely on the same conditional payment provision as a defense. FIXTURE SPECIALISTS, INC. V. GLOBAL CONSTRUCTION, LLC, 2009 WL (D.N.J. 2009)

14 14 CONDITIONAL PAYMENT PROVISION AT ISSUE IN FIXTURE Subcontractor agrees that Contractor shall never be obligated to pay Subcontractor under any circumstances, unless and until funds are in hand received by Contractor in full...This is a condition precedent to any obligation of Contractor, and shall not be construed as a time of payment clause...

15 15 POSITION OF GENERAL CONTRACTOR AND SURETY Full payment by the owner is an express condition precedent to any obligation of general contractors duty to pay subcontractor based on conditional payment provision in subcontract. Surety entitled to assert all defenses of its bond principal and, therefore, permitted to refuse to pay subcontractor under payment bond based on conditional payment provision.

16 16 POSITION OF SUBCONTRACTOR No express intention of the parties to transfer the risk of collection to subcontractor. Conditional payment provision in subcontract simply permits general contractor a reasonable time to pay subcontractor. Conditional payment provision violates provisions of construction lien law. Surety may not rely on the conditional payment provision as a defense to subcontractors claim when language is not incorporated into payment bond.

17 17 COURTS DECISION IN FIXTURE 1. Conditional payment provision created a valid condition precedent to the general contractors liability to the subcontractor. It is not the use of when or if that is dispositive of the enforceability of the clause, but whether there is clear evidence of an intent by both parties to shift the risk of collection.

18 18 [T]he express language employed in the payment clause in Section 5.3 is clear-the parties intended to shift any and all circumstances of Owner's nonpayment to [subcontractor]. Undoubtedly, the all- encompassing nature of the phrases never be obligated to pay and under any circumstances clearly and unambiguously expressed that [subcontractor] has agreed to assume the risk of the Owner's nonpayment. COURTS DECISION IN FIXTURE

19 19 2.The subcontracts conditional payment provision did not violate the applicable lien law. The conditional payment provision did not prevent subcontractor from filing a lien to preserve lien rights as lien foreclosure would be stayed until all the preconditions to payment are met under NJ law. Subcontractor could have filed a lien to attempt to receive payment and it would not have been in bad faith notwithstanding conditional payment clause. COURTS DECISION IN FIXTURE

20 20 3. Surety entitled to rely on conditional payment provision as defense to subcontractors claim under payment bond. Based on fundamental concepts of suretyship, and distinctions between suretyship and insurance under NJ law, the Fixture court concluded that a suretys liability is triggered only when the bond principals debt matures. COURTS DECISION IN FIXTURE

21 21 The Fixture court, therefore, found that it logically follows that if the general contractor in that case had not been paid by the owner, then the general contractor has not defaulted on a debt owed to the subcontractor. Consequently, the court in Fixture concluded that the surety in that case was entitled to pursue its defense that it is not obligated on the payment bond until the principal becomes obligated on the debt. COURTS DECISION IN FIXTURE

22 22 PRACTICE TIPS AND CONCLUSION Extra Work Issues Disputed Work Issues Liquidation Agreements Advice from Broker/Agent

23 23 Advice from Broker/Agent Know the Difference between when and if Can the clause be changed? -Probably Not- Advise client to seek legal advice on the impact to Mechanics Lien Rights PRACTICE TIPS AND CONCLUSION

24 24 Advice from Broker/Agent What to do if there is a claim PRACTICE TIPS AND CONCLUSION

25 25 If you do not have the opportunity to have your question addressed during the Seminar, you may contact the presenters directly: James Rudnik – John Morris – YOUR QUESTIONS?

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