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April 2009
In This Issue
Viability of "Pay When Paid" Clauses In NY & NJ
New Jersey Increases Construction Spending
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NJ Increases Construction Spending
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The New Jersey Department of Transportation on Monday released its proposed Fiscal Year 2010 Transportation Capital Program, earmarking $3.6 billion in funds for projects that would create jobs, relieve congestion, improve the mass transit system, and increase the overall safety of the State transportation network. Of the total, $2.2 billion would go to the NJ DOT's capital program for improving bridges, pavement and roadway safety and decreasing traffic congestion. The remaining $1.4 billion would go to NJ TRANSIT's capital program for modernizing the transit system and investing in system repairs, including safety and security, and advance strategic expansion. The program would be funded with $1.6 billion from the state Transportation Trust Fund, $1.73 billion in federal funding and $239 million from other sources.

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New Jersey's Lien Law: Update 2009, by
Steven Cohen, Esq., April 21, 2009, New Brunswick, NJ
Viability of "Pay When Paid" Clauses In New York & New Jersey

 Construction contracts often contain provisions referred to as "pay-when-paid" and "pay-if-paid" clauses.  A typical "pay-when-paid" clause might read: "Contractor shall pay subcontractor within seven days of contractor's receipt of payment from the owner."  Under such a provision in a construction subcontract, a contractor's obligation to pay the subcontractor is triggered upon receipt of payment from the owner.  The theory is that a "pay-when-paid" clause creates a timing mechanism only.  Such a clause does not create a condition precedent to the obligation to ever make payment, and it does not expressly shift the risk of the owner's nonpayment to the subcontractor.
 New Jersey Law on the "Pay-when-Paid" Clause 
 The only reported case applying New Jersey law to the "pay when paid"/"pay-if-paid" contract clause is Seal Tite Corp. v. Ehret, Inc., where a contractor contended that the clause precluded an obligation to pay a subcontractor where the contractor did not receive payment from an owner who elected bankruptcy.  The District Court in Seal Tite, concluded that in the absence of express language indicating the parties' intention to shift the collection risk from the contractor to the subcontractor, the pay-when-paid clause represented an unconditional promise to pay, merely permitting payment to be postponed for a reasonable time, but not a condition precedent that would excuse the general contractor's payment obligation entirely.
 The Seal Tite Court did address the issue that a general contractor and its subcontractor must deal with the "credit risk" of having the owner going out of business, thus not paying the general contractor and subsequently the subcontractor.  However, the Seal Title Court concluded that because the payment clause did not make reference to the possibility of the owner's insolvency (this means explicit reference in the contract), but did refer to the amount, time and method of payment, the clause was merely a provision "designed to postpone payment for a reasonable period of time after the work was completed, during which the general contractor would be afforded the opportunity of procuring from the owner the funds necessary to pay the subcontractor." Therefore, when dealing with a "pay when paid" clause in New Jersey, the standard is to provide the general contractor a "reasonable time' to procure payment from the owner.  This type of question is one that will invariably change depending on the facts and the particular judge of that case.  
New York Caselaw on "Pay when Paid" Clause
 Unlike New Jersey where a "pay-when-paid" clause is held to be enforceable for a reasonable period of time (as mentioned above, "reasonable" is a question of fact and depends on the specific facts and the Judge presiding over the case), other jurisdictions, including New York, have held the "pay when paid" clause and the "pay-if-paid" clause unenforceable as against public policy because these clauses purport to shift the collection risk to the subcontractor by making the general contractor's receipt of payment a condition precedent to the subcontractor's right to payment.  
 The seminal case in the New York Court of Appeals case of Westfair-Electric Contractors v. Aetna Casualty & Surety Company, which held that a "pay-when-paid" provision which forces a subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to public policy as set forth in Lien Law �34.  The Court of Appeals reviewed the Legislature's intent in enacting Lien Law �34 in reaching its determination that the pay-when-paid provision at issue was contrary to public policy.  The Court of Appeals stated:
"[s]ince the year 1897, the Legislature has recognized the need to afford protection to those who furnish work, labor, and services or provide materials for improvement of real property. Throughout the succeeding year changes in the law have been enacted to clarify, enlarge, and perfect the right of those who improve real property to be paid. It had become prevalent in the construction industry to require contractors, subcontractors, materialmen, and laborers to sign contracts or subcontracts containing clauses that limit these peoples' right to recovery for work performed and accepted. The surrender of such protective rights as a prerequisite to obtaining a contract or subcontract is repugnant, against public policy and should be voided."
 Thus, while New Jersey Courts will enforce the "pay-when-paid" provision for a reasonable amount of time (with no New Jersey Court to date definitely setting forth what constitutes a "reasonable period of time"),  New York Courts deem the same provisions unenforceable based upon public policy tenants.
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If you are interested in reading some more articles written by Tesser & Cohen's attorneys, please visit the section of our website entitled "Newsletters" located at the following link: http://www.tessercohen.com/newsletter.htm