Condition precedent payment terms, the so called "pay-if-paid" clause, have proliferated in the construction industry in the last twenty-five years. These clauses create both practical and theoretical considerations. The practical consideration is will a subcontractor be awarded a subcontract if it refuses to sign a subcontract containing the pay-if-paid clause. The theoretical consideration is where should the risk of non-payment by an owner lie - with the general contractor who deals with the owner or with the subcontractor who does not.
The pay-if-paid clause is under attack in many states. Two states (North Carolina and Wisconsin) have outlawed the pay-if-paid clause by statute. Three states have not barred pay-if-paid clauses, but have provided by statute that these clauses are not a defense to a mechanic's lien claim (Illinois, Missouri and Maryland) or to a payment bond claim (Maryland). In three other states (New York, Florida and California) courts, even in the absence of any statutory prohibitions, have either found the clause to be against public policy and unenforceable, or have refused to allow a payment bond surety to use a pay-if-paid clause as a defense to defeat a bond claim.
The most recent decision was by New York's highest state court which in December 1995 found that a pay-if-paid clause in a subcontract conflicted with the New York mechanic's lien law and ruled the clause unenforceable as contrary to public policy. The New York court concluded that the general contractor and its surety had to pay the subcontractor even though the general contractor did not receive payment for the work performed.
What is the status of pay-if-paid clauses in Massachusetts? The courts have not directly ruled on whether such a clause violates public policy. In 1969, in a case involving interpretation of a payment clause that required the general contractor to pay the subcontractor when the general contractor received payment from the owner (pay-when-paid), the Massachusetts Supreme Judicial Court found that the payment was due the subcontractor within a "reasonable" time irrespective of whether the general contractor ultimately received payment from the owner. In that decision the court noted that the clause in question (pay-when-paid) was different than payment terms stated as a condition precedent (pay-if-paid). The court indicated that a pay-if-paid clause would be enforceable. However, the court never considered whether enforcement might conflict with mechanic's lien or public bond statutes in Massachusetts.
Now that other courts and legislatures have struck down the enforceability of a pay-if paid clause, it is likely that the issue will be raised soon in Massachusetts. However, presently there is no judicial interpretation or statute that bars a pay-if-paid clause in Massachusetts. That issue remains up in the air in Massachusetts.
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