Payment Provisions in Construction Contracts and Construction Trust Fund Statutes: A Fifty State Survey

By: Robert F. Carney

Whiteford, Taylor & Preston LLP

Seven St. Paul Street

Baltimore, Maryland 21202

(410) 347-8726

rcarney@wtplaw.com

With: Adam Cizek

Whiteford, Taylor & Preston LLP

I. INTRODUCTIONi

This article surveys the law on the enforceability of the common construction contract provisions referred to as “pay-when-paid” and “pay-if-paid” provisions in each of the 50 states and the District of Columbia. This article also surveys the law on the statutory trusts enacted by some state legislatures regarding payments on construction projects, which statutes are commonly referred to as construction trust fund statutes. We asked our contributors to summarize the current state of the law on “pay-when paid” clauses separately from “pay-if-paid” clauses, as many courts treat the two differently. We further asked our contributors to describe any differences in the enforceability of such clauses in general contracts and in subcontracts and on public projects and on private projects. For states with construction trust fund statutes, we asked our contributors to address the types of projects to which the statute applies, the parties to whom the statute applies, the funds to which the trust attaches, the remedies available for violations of the trust, and whether the trustee is entitled to commingle the trust funds. Our original intent had been to develop a matrix, but as the reader will see the answers to these questions do not lend themselves to small boxes. We appreciate the efforts of the many contributors from around our great country who were willing to research and summarize the current law in their respective jurisdiction. The summaries are intended to be exactly that; they do not purport to address every nuance of the law or every possible fact pattern. Consultation with knowledgeable local counsel is, of course, advisable to understand the application of these general principles to any particular real life situation.

II. “PAY-WHEN-PAID” AND “PAY-IF-PAID” PROVISIONS

Parties are generally free to negotiate the terms of their contracts, and are generally permitted to negotiate and allocate the risks under their contracts, including the risk of non-payment. Many courts take a strict view of contracts.ii They see contracts as private law making and will not revise the terms of the contract to achieve “equity.”iii Other courts strictly construe risk shifting provisions that result in harsh outcomes for contracting party that is viewed as less capable of assuming the shifted risk.iv Those courts may find such provisions void as against public policy.v Some state legislatures have enacted laws prohibiting provisions in contracts shifting the risk of non-payment.vi Alternative dispute resolution providers also address those clauses. The growing view of the industry is that condition precedent clauses of all sorts are easily overcome in alternative dispute resolution, leading many owners or general contractors to abandon arbitration clauses altogether. vii

While the terms “pay-when-paid” and “pay-if-paid” are commonly used in the construction industry and are distinct clauses, commentators and courts have not universally applied these terms in discussing such provisions. Some courts refer to both provisions as “pay-when-paid” provisions and simply differentiate between those “pay-when-paid” provisions that act as reasonable timing provisions from those that act as conditions precedent. Therefore, it is critical to examine the actual contractual provision at issue in a case to determine the court’s actual holding – do not rely on the characterization of the clause in the opinion.

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 a “pay-when-paid” provision in a construction subcontract, a contractor’s obligation to pay the subcontractor is triggered upon receipt of payment from the owner.viii Most courts hold that such a clause means that the contractor’s obligation to make payment is suspended for a reasonable amount of time for the contractor to receive payment from the owner.ix 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 make payment and does not expressly shift the risk of the owner’s nonpayment to the subcontractor. We have seen no jurisdiction that treats a pure “pay-when-paid” clause as a condition precedent to payment. We saw no trends indicating a difference in the enforcement of “pay-when-paid” clauses on private projects as opposed to public projects or at different tiers of contractors.

A typical “pay-if-paid” clause might read: “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 non-payment and the subcontract price includes this risk.” Under a “pay-if-paid” provision in a construction contract, receipt of payment by the contractor from the owner is an express condition precedent to the contractor’s obligation to pay the subcontractor. A “pay-if-paid” provision in a construction subcontract shifts the risk of the owner’s non-payment under the subcontract from the contractor to the subcontractor.x In many jurisdictions, courts will enforce a “pay-if-paid” provision if the provision is clear and unequivocal.xi Courts will generally find that a “pay-if-paid” provision does not create a condition precedent, but rather a reasonable timing provision, where the “pay-if-paid” provision is ambiguous.xii Some courts have held that the use of the term “condition precedent” in a “pay-if-paid” provision is sufficient to render the clause enforceable as a condition precedent.xiii At least one court has held that inclusion of the term “condition precedent” is not dispositive, and that the language of the “pay-if-paid” provision must include unequivocal language indicating that the monies owed under the subcontract are only to be paid out of the construction funds that the contractor is to receive from the owner.xiv

At least two jurisdictions have held that “pay-if-paid” provisions are void as against public policy because such provisions violate the anti-waiver provisions in the states’ mechanic’s lien statutes.xv While the “pay-if-paid” provisions involved in these cases did not expressly waive the subcontractors’ right to pursue a mechanic’s lien, the courts found that the “pay-if-paid” provisions effectively prevented the subcontractors from pursuing their mechanic’s lien rights in violation of public policy.xvi Under the statutes, the subcontractors’ mechanic’s lien rights are measured by the amounts due them under their subcontracts; therefore, if the “pay-if-paid” provisions were enforceable, the subcontractors would not have been due payment and could not pursue a remedy under the mechanic’s lien statutes.xvii Some other jurisdictions have legislatively rendered “pay-if-paid” clauses inapplicable to mechanic’s liens on the theory that if the owner is not paying the general contractor, the subcontractors should be entitled to pursue the owner directly.xviii Some states have legislatively prohibited conditional payment provisions all together.xix Other states have legislatively restricted their application, for example to permit a subcontractor to pursue a bond claim or lien action.xx We have seen no trends towards treating “pay-if-paid” clauses differently on public projects as opposed to private projects or at different tiers of contractors.

Parties attempting to utilize a “pay-if-paid” provision in a construction contract should be sure to research the applicable case law and statutes in their jurisdiction to determine whether such provisions are enforceable and whether there is any specific language that must be utilized in order for the provision to be deemed a condition precedent to payment. Likewise, parties presented with conditional payment provisions should be sure to research applicable case law and statutes to determine the risks that will be shifted to them as a result of such contractual language.

III. CONSTRUCTION TRUST FUND STATUTES

Several states have enacted construction trust fund statutes in an attempt to ensure that subcontractors, and is some cases sub-subcontractors and suppliers, are paid monies owed to them for labor and/or materials supplied to construction projects.xxi A typical construction trust fund statute may provide as follows: “Any moneys paid under a contract by an owner to a contractor, or by the owner or contractor to a subcontractor, for work done or materials furnished, or both, for or about a building by any subcontractor, shall be held in trust by the contractor or subcontractor, as trustee, for those subcontractors who did work or furnished materials, or both, for or about the building, for purposes of paying those subcontractors.”xxii Such a provision complies with all the necessary prerequisites for establishment of a trust under state law.xxiii The trustee is the party who receives the monies. The trust property or res is the moneys paid for work done or materials furnished, or both, for or about the building. The trust beneficiaries are the subcontractors who did the work or furnished the materials. The purpose of the trust and the means by which the trustee can discharge its obligations are clearly identified; the purpose of the trust is to pay the trust beneficiaries.

Construction trust fund statutes attach a trust to funds paid or to be paid to contractors, and in some cases subcontractors, for the benefit of those supplying labor and/or material to a construction project.xxiv Some construction trust fund statutes distinguish between public and private contracts and only apply to a specific class of project.xxv Other constructive trust fund statutes apply only to claims that would be the proper subject of a mechanic’s lien.xxvi In such states, it follows that the statute would not apply on a public works project as such a project is not lienable.xxvii

The various states’ construction trust fund statutes vary widely with regard to the remedies provided under the statutes. Some states’ statutes provide for civil remedies such as attorney’s fees or interest if the construction trust funds are misappropriated.xxviii Other states’ statutes do not provide civil remedies for misappropriation of construction trust funds; instead these statutes provide solely criminal penalties in an attempt to deter misappropriation.xxix Some states construction trust fund statutes provide both criminal and civil penalties.xxx Construction trust fund statutes that provide criminal sanctions for misappropriation of trust funds generally only apply to funds already paid to a contractor.xxxi The criminal trust fund statutes do not create private causes of action in favor of unpaid subcontractors.xxxii

A few states provide for personal liability for officers or directors of the contractor if the trust funds are misappropriated.xxxiii This personal liability is usually only imposed on the officers or directors who controlled distribution of the trust funds.xxxiv The statute may require proof of the officer’s or director’s intent to defraud the trust beneficiary.xxxv Such an officer or director may be personally liable even if the construction trust fund statute does not so provide.xxxvi

A construction trust fund statute provides significant protection in the event that a contractor files for bankruptcy. When a contractor files bankruptcy, the owner, the subcontractors, and the contractor’s surety are understandably concerned. If the contractor can use the funds received from the owner for any purpose, the owner faces a dilemma. If it pays the contractor/debtor and the contractor/debtor fails to pay its subcontractors, those subcontractors may have lien rights under applicable state law. If the subcontractors obtain liens, the owner may pay twice for the work. The subcontractors are likewise worried that the contractor/debtor will redirect the funds and the subcontractors will need to incur the transaction costs of filing a lien or a claim on the contractor’s bond to obtain payment, or that such remedy may be barred by a notice or limitations provision. The trust fund statute resolves these problems. It protects the owner from liens, the subcontractors from non-payment, and the surety from claims by protecting the funds paid or to be paid by the owner from the claims of the contractor/debtor, its trustee, or its creditors. xxxvii Pursuant to section 541(d) of the Bankruptcy Code, property in which a debtor holds only legal title and not equitable title becomes part of the debtor’s bankruptcy estate only to the extent of debtor’s legal title.xxxviii If there is a valid trust in existence, “property of the debtor held in trust at the time of filing its bankruptcy petition is excluded from the bankruptcy estate.’”xxxix To the extent that there is a valid trust in existence, construction trust funds paid to the debtor after the filing of bankruptcy are held by the debtor subject to the trust obligations.xl

Normally, a debt resulting from the debtor’s defalcation while acting in a fiduciary capacity can be exempted from discharge.xli The courts have consistently limited the meaning of “fiduciary capacity” to express or technical trusts.xlii The requisite trust relationship must exist prior to and without reference to the act of wrongdoing.xliii This requirement eliminates constructive, resulting, or implied trust from the scope of fiduciary obligations that will support a finding of non-dischargeability.xliv Several courts have addressed the question of whether a violation of a construction trust fund statute can support a finding of non-dischargeability. For those statutes which provide solely criminal remedies, the courts have generally held that misappropriation of the trust funds does not support a finding of non-dischargeability.xlv They view such statutes as closer to constructive or resulting trusts. For construction trust fund statutes that do not require segregated accounts but do create express trust requirements that arise before any wrongdoing, the courts generally hold that a misappropriation of the trust funds will support a finding of non-discharageability.xlvi Likewise, statutes that require the contractor to segregate and keep detailed records of the funds find the trust to be sufficient to support a determination of non-dischargeability.xlvii Thus, the terms of the statute must be closely analyzed to see if a sufficient fiduciary capacity is imposed upon the trustee to support a finding of non-dischargeability.

Most construction trust fund statutes set forth little or no procedural requirements for the maintenance of the trust funds and may expressly permit commingling of trust and non-trust funds.xlviii Other statutes require that detailed accountings be kept for each trust.xlix If commingling is permitted, the funds do not lose their trust nature as a result.l

It is important for owners, contractors and subcontractors to understand the applicable construction trust fund statute, assuming there is one that will govern a particular project as a construction trust fund statute may provide useful remedies and may also impose significant obligations and penalties. It is also important that the case law interpreting the applicable construction trust fund statute be carefully reviewed to determine how liberally or conservatively courts have applied the obligations and remedies provided by the statute.

IV. CONCLUSION

Payment provisions can have significant financial consequences for any party that has assumed the risk of non-payment, and can have significant financial benefits for the party that has shifted the risk of non-payment. Parties negotiating a construction contract should closely scrutinize conditional payment provisions to determine the effect of such provisions before entering into the contract. Likewise, construction trust fund statutes can provide useful remedies to owners, contractors, subcontractors, and sureties. The party charged with maintaining a construction trust fund should be familiar with specific requirements of the statute prior to the commencement of the construction project in order to ensure compliance with any procedural requirements and to avoid liability for remedies available under the statute.

SURVEY OF PAYMENT PROVISIONS

AND TRUST FUND STATUTES

ALABAMA

W. Alexander Moseley

Hand Arendall LLC

P.O. Box 123

Mobile, Alabama 36601

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To what extent are they enforceable on public projects?

The answer in Alabama is unclear. The only recent, authoritative case on subcontract payment clauses in Alabama, Federal Insurance Co. v. I. Kruger, Inc., 829 So. 2d 732 (Ala. 2002), dealt with what would normally be regarded as a “pay-when-paid” clause, stating that final payment would be made after the last of certain events, including payment by the owner to the contractor, but which the general contractor described in its briefing as a “pay-if-paid” clause, attempting to use it to preclude payment to the subcontractor indefinitely even thought the prime contract had been terminated, and citing authorities in support of its enforcement that clearly dealt with conditions precedent. The Supreme Court characterized the language as a “pay-when-paid” clause, and held that the clause could not be enforced as a condition precedent to the general contractor’s obligation to make payment to the owner, but merely provided a timing mechanism for payment. However, the language of the decision left some doubt as to whether a properly drafted “pay-if-paid” clause could be enforced, since it relied heavily upon the absence of any evidence in the record to indicate that the subcontractor “assumed the risk of nonpayment by the [owner] for events completely outside its control of influence,” Id. at 739, and distinguished the instant case from a prior Alabama Supreme Court decision in which a subcontractor was held to be bound to avoid payment after the contractor received payment from the owner, since “the circumstances clearly indicated that the subcontractor assumed the risk of nonpayment.” Id. at 740. If the subcontract had been drafted, as many are, to provide that the owner’s payment to the general contractor was an absolute condition precedent to any payment to the subcontractor, and to include a recitation by the subcontractor that it was knowingly assuming the risk of owner non-payment, the Supreme Court might well have enforced the clause.

Although I. Kruger involved a public contract, the Court did not make any distinction between public and private contracts in its discussion of the issue and, in fact, relied in support of its holding on an ancient Alabama case involving a private contract. However, the Court did refuse to allow the general contractor’s payment bond surety to take advantage of the “pay-when-paid” clause as a defense to the subcontractor’s claim under Alabama’s “Little Miller Act,” Ala. Code § 39-1-1 (1975), at least without incorporating such a clause into the bond itself directly or by reference.

The Alabama Courts have decided no case in which a clear distinction of any sort between a subcontractor’s and a vendor’s right to payment is made.

B. To what extent are they enforceable on private projects?

It appears that Alabama law does not distinguish between public and private projects with respect to the enforceability of a “pay-if-paid” clause in a subcontract or supply contract (with the exception of the surety’s inability to take advantage of the clause, mentioned above).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To what extent are they enforceable on public projects?

The case of Federal Construction Co. v. I. Kruger, Inc., supra, involved a public project and, as discussed, the Supreme Court, in effect, refused to allow the general contractor to apply its “pay-when-paid” clause as a “pay-if-paid” clause. In its interpretation of the clause, however, the Supreme Court seemed to enforce it like what is often understood to be a “pay-when-paid” clause, meaning subcontract payment language which is “held to merely delay the final payment by a general contractor to a subcontractor; a general contractor’s duties to pay a subcontractor, within a reasonable time after subcontractor has completed performance, remains absolute, even if the general contractor never receives payment from an owner.” See Gerald B. Kirksey, “Minimum Decencies” - A Proposed Resolution of the “Pay-When-Paid”/”Pay-if-Paid” Dichotomy, 12:1 The Constr. Law. 1 (Jan. 1992).

For that matter, Alabama statutes approve of the concept of “pay-when-paid” in terms of timing. Alabama’s Prompt Payment Act, Ala. Code §§ 8-29-1, 8-29-8 (1975), imposes obligations on general contractors to pay their subcontractors, and subcontractors to pay their sub-subcontractors and material suppliers, timely in accordance with the payment terms agreed to but if no such terms have been agreed to, then within seven days of receipt of payment from their own customers. Id. § 8-29-3. This statute does not apply to state and local government contracts. Id. § 8-29-7. However, a similar requirement is imposed on state contractors by Ala. Code § 41-16-3 (1975).

B. To what extent are they enforceable on private projects?

In ruling on the defendant’s “pay-when-paid” clause in Kruger, the Court relied in part upon its own 1897 decision in Crass v. Scruggs, 115 Ala. 258, 22 So. 81 (1897), involving a subcontractor to a railroad contractor and holding that a promise to pay as soon as payment from the railroad had been received did not create a condition precedent to payment, but merely prescribed a time for payment. Accordingly, it does not appear that Alabama recognizes any distinction between public and private contracts and subcontracts with respect to the enforceability of “pay-when-paid” clauses, with the exception again of the effect of a Little Miller Act payment bond.

3. TRUST FUND STATUTES

Alabama does not have a construction trust fund statute.

ALASKA

Robert J. Dickson, Esquire

420 L Street, Suite 500

Anchorage, AK 99501-1037

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Alaska has no cases on “pay-if-paid” clauses. However, Alaska has a statute called the Public Construction Contract Prompt Payment Act, Alaska Stat. §§ 36.90.200, et seq., which governs general contractors’ payment obligations to subcontractors on public contracts. The act requires the State or public agency to pay the general contractor within 30 calendar days of receiving a properly executed and supported pay request as long as there is no issue over performance. If a basis for withholding exists, payment can be withheld without interest penalties, but must be paid within 21 calendar days after the grounds for withholding have been removed.

The same act requires the general contractor to pay the subcontractor within eight working days of receiving the agency’s payment for the subcontractor’s work. The statute preserves the general contractor’s ability to withhold amounts from the subcontractor for performance issues, but requires the general contractor to give notice to both the State as well as the subcontractor in the event of such a withholding. Retainage withheld from the subcontractor must be paid within eight working days of the receipt by the general of final payment from the State or its agency. Interest is due on the retainage at the rate of 10.5 percent per annum from the time the retainage is withheld.

B. To What Extent Are They Enforceable on Private Projects

There are no Alaska cases addressing the issue of “pay-if-paid” clauses on private projects. The Alaska Supreme Court would likely follow the weight of recent authorities from other states.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

The only Alaska Supreme Court case dealing with a “pay-when-paid” clause is Indus. Indem. Co. v. Wick Constr. Co., 680 P.2d 1100 (Alaska 1984) in which the court addressed a clause in a subcontract that required the general contractor to pay the subcontractor the final payment within five days of the contractor’s receipt from the owner of final payment for subcontractor’s portion of the work. The issue was when prejudgment interest (allowed in almost all cases in Alaska) should have commenced accruing. The court ruled that the prejudgment interest due for the retainage should have begun five days after the general contractor received final payment from the owner for the subcontractor’s portion of the work rather than when the subcontractor had actually earned that amount by final completion of its work. Id. at 1106. In essence the court enforced the clause.

As discussed above, Alaska has a statute, the Public Construction Contract Prompt Payment Act, Alaska Stat. §§ 36.90.200, et seq., which deals with these issues on public contracts.

B. To What Extent Are They Enforceable on Private Projects

The Alaska Supreme Court has had no cases involving a “pay-when-paid” clause on a private project. The court in essence enforced such a clause dealing with final payments on a public project, see, Industrial Co., supra., and is likely to follow the weight of recent authorities from other states on the issue of the enforceability of such clauses in a private construction setting.

III. TRUST FUND STATUTES

Alaska does not have a trust fund statute. Further, in Donnybrook Bldg. Supply Co. v. Alaska Nat’l Bank, 736 P.2d 1147 (Alaska 1987), the court held that the mechanic’s lien statute was intended to be “a complete remedy,” and thus preempted all common law and equitable remedies that might otherwise have been available to a contractor against third parties not in direct contract privity. Consequently, the theory that a construction lender holds the loan proceeds in trust for those working on the project is not available in Alaska under the Donnybrook decision. Construction lenders and others not in direct contractual privity with a contractor or subcontractor still face tort liability for tortious conduct such as misrepresentation toward a contractor. See, Great W. Say. Bank v. George Easley Co., 778 P.2d 569 (Alaska 1989).

ARIZONA

James L. Csontos, Esquire

Jennings Haug & Cunningham, LLP

2800 N. Central Ave., Suite 1800

Phoenix, Arizona 85004-1049

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-if-paid” provisions are enforceable against subcontractors on both public and private projects where the language of the subcontract “plainly and unambiguously” indicates that receipt of payment by the contractor from a specified fund is a condition precedent to the contractor’s obligation to pay the subcontractor. See L. Harvey Concrete, Inc. v. Agro Construction & Supply Co., 189 Ariz. 178, 939 P.2d 811 (1997).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-when-paid” provisions are enforceable against subcontractors on both public and private construction projects. See Watson Constr. Co. v. Reppel Steel & Supply Co., Inc., 123 Ariz. 138, 598 P.2d 116 (App. 1979).

III. TRUST FUND STATUTES

Arizona has a construction trust fund statute that applies to owner-occupied residential construction, Ariz. Rev. Stat. § 33-1005. The construction trust fund statute applies to monies paid by the owner to the general contractor. Violation of the statute can expose individual corporate officers or directors to personal liability for misappropriation of construction trust funds and such debts may not be dischargeable in bankruptcy. See Woodworking Enterprises, Inc. v. Baird, 114 B.R. 198 (9th Cir. 1990). There is no requirement under the statute that the trust funds be held in a separate account.

ARKANSAS

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Arkansas has a Contractors’ Payment Protection Act codified at Section 22-9-205 of the Arkansas Code. It specifically states that “payment shall be made upon completion and approval” clauses in construction contracts are enforceable. The statute is applicable to contractors who perform work for any agency of the state, county, municipality, school district or other local taxing unit.

B. To What Extent Are They Enforceable on Private Projects

Manuel v. Campbell, 3 Ark. 324 (1841), involved a private project. The Supreme Court of Arkansas held that a payment clause in which the party agreed to pay the other “immediately on the completion of the work” was a condition precedent. The Court stated, “when the day or the time appointed for the payment of money, or performance of an act is to happen after the thing which is the consideration is to be performed, no action can be maintained before performance of the condition.”

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Arkansas has a Contractors’ Payment Protection Act codified at Section 22-9-205 of the Arkansas Code. It specifically states that “payment shall be made upon completion and approval” clauses in construction contracts are enforceable. The statute is applicable to contractors who perform work for any agency of the state, county, municipality, school district or other local taxing unit.

B. To What Extent Are They Enforceable on Private Projects

Manuel v. Campbell, 3 Ark. 324 (1841), involved a private project. The Supreme Court of Arkansas held that a payment clause in which the party agreed to pay the other “immediately on the completion of the work” was a condition precedent. The Court stated, “when the day or the time appointed for the payment of money, or performance of an act is to happen after the thing which is the consideration is to be performed, no action can be maintained before performance of the condition.”

III. TRUST FUND STATUTES

Arkansas does not have a trust fund statute. Rather, Arkansas has a statute which imposes criminal liability on contractors who receive funds from an owner but fail to pay the amounts over to their subcontractors and suppliers. Ark. Code Ann. §18-44-132. In, In Re Bass Mechanical Contractors, Inc., the Court construed Ark. Code. Ann. §18-44-132 to be insufficient to create a trust for suppliers. 84 B.R. 1009 (1988) (Bankr. W.D. Ark. 1988).

CALIFORNIA

James Diwik, Esquire

Sedgwick, Detert, Moran & Arnold, LLP

3 Park Plaza, 17th Floor

Irvine, California 92614-8540

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. Public Projects

“Pay-if-paid” provisions are not enforceable against subcontractors on public construction projects as such provisions are contrary to public policy in that they act as an indirect waiver of a subcontractor’s right to assert a claim against a statutorily required payment bond. See Capitol Steel Fabricators, Inc. v. Mega Constr. Co, Inc., 58 Cal. App. 4th 1049 (1997).

B. Private Projects

“Pay-if-paid” provisions are not enforceable on private projects because they are contrary to public policy in that they act as an indirect waiver of a subcontractor’s constitutional right to assert a mechanic’s lien for unpaid labor and material. See William R. Clarke Corp. v. Safeco Ins. Co., 938 P.2d 372 (Cal. 1997).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. Public Projects

“Pay-when-paid” clauses are likely enforceable on public projects if the language of the contract provides that payments are due when they are earned by not payable until the prime contractor receives payment from the owner, or upon completion of the project. See Capitol Steel Fabricators, Inc. v. Mega Constr. Co, Inc., 58 Cal. App. 4th 1049 (1997). However, payment must be made upon the subcontractor’s performance or within a reasonable time thereafter. See Yamanishi v. Bleily & Collishaw, Inc., 29 Cal. App.3d 457 (1972).

2. Private Projects

“Pay-when-paid” clauses are likely enforceable on private projects if the language of the contract provides that payments are due when they are earned by not payable until the prime contractor receives payment from the owner, or upon completion of the project. See Capitol Steel Fabricators, Inc. v. Mega Constr. Co, Inc., 58 Cal. App. 4th 1049 (1997). However, payment must be made upon the subcontractor’s performance or within a reasonable time thereafter. See Yamanishi v. Bleily & Collishaw, Inc., 29 Cal. App.3d 457 (1972).

III. TRUST FUND STATUTES

California does not have a construction trust fund statute; however, the 9th Circuit Court of Appeals Bankruptcy Appellate Panel has determined that a construction subcontract which contains a trust provision establishes a fiduciary duty on the part of the contractor receiving contract proceeds. In re Gonzales, 22 B.R. 58 (9th Cir. B.A.P. 1982).

COLORADO

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Colorado will enforce “pay-when-paid” and “pay-if-paid” clauses, although a contractual provision must unequivocally state the parties’ intent that payment be a condition precedent and that risk of owner or upstream contractor insolvency is shifted to the subcontractor in order to be construed as a “pay-if-paid” clause. See Main Elec., Ltd. v. Printz Servs. Corp., 980 P.2d 522, 527 (Colo. 1999).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Colorado will enforce “pay-when-paid” and “pay-if-paid” clauses, although a contractual provision must unequivocally state the parties’ intent that payment be a condition precedent and that risk of owner or upstream contractor insolvency is shifted to the subcontractor in order to be construed as a “pay-if-paid” clause. See Main Elec., Ltd. v. Printz Servs.Corp., 980 P.2d 522, 527 (Colo. 1999).

III. TRUST FUND STATUTES

Colorado has a construction trust law, Colo. Rev. Stat. Ann. §38-22-127. It provides that all funds disbursed to a contractor or subcontractor on a project subject to Colorado’s mechanics’ lien law are held in trust for downstream subcontractors who may have a lien against the subject property. Colo. Rev. Stat. Ann. §38-22-127(a). However, where the contractor or subcontractor to whom the disbursement was made has a good faith belief that the lien claim is invalid or is subject to setoff, no trust is created. Colo. Rev. Stat. Ann. §38-22-127(b). Colorado imposes personal liability upon those officers controlling the disbursement of funds who divert trust funds to other obligations of the contractor or subcontractor. See Flooring Design Assocs., Inc. v. Novick, 923 P.2d 216, 221 (Colo. App. 1995).

CONNECTICUT

Matthew M. Horowitz, Esquire

Wolf, Horowitz, Etlinger, & Case, L.L.C.

241 Main Street

Hartford, CT 06106-1862

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

1. Prime Contracts

Under Conn. Gen. Stat. § 49-41a (a)(1), every public works contract in an amount in excess of $50,000 is deemed as a matter of law to incorporate a provision requiring the contractor to pay its subcontractors for amounts included on the contractor’s payment application to the owner within thirty days after the public owner has paid the contractor for the particular payment application. There is no case law construing the statutory payment clause under circumstances where payment by the owner is delayed to the contractor for reasons unrelated to the work performed or services provided by a particular subcontractor. For consideration of this issue in regard to a contractual payment clause see R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001).

2. Subcontracts.

Under Conn. Gen. Stat. § 49-41a (a)(2), every subcontract issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the subcontractor to pay its sub-subcontractors for amounts paid by the contractor to the subcontractor for the sub-subcontractor’s work within thirty days after the contractor has paid the subcontractor for the sub-subcontractor’s work. There is no case law construing the statutory payment clause under circumstances where payment by the contractor is delayed to the subcontractor for reasons unrelated to the work performed or services provided by a particular sub-subcontractor. For consideration of this issue in regard to a contractual payment clause. See R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001).

3. Vendors

It appears that the terms of Conn. Gen. Stat. § 49-41a (a)(1) and (2) are fully applicable to agreements between vendors and contractors or subcontractors. See Connecticut Electric Equipment Co. v. Fidelity & Guaranty Insurance Co., 2002 Conn. Super. Lexis 3410 (2002). Assuming that this is the case: (a) every vendor agreement with a contractor issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the contractor to pay its vendors for amounts included on the contractor’s payment application to the owner within thirty days after the public owner has paid the contractor for the particular payment application; and (b) every vendor agreement with a subcontractor issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the subcontractor to pay its vendors for amounts paid by the contractor to the subcontractor for the vendor’s materials within thirty days after the contractor has paid the subcontractor for the materials. There is no case law construing the statutory payment clause under circumstances where payment for the materials by the owner to the contractor or by the contractor to the subcontractor is delayed for reasons unrelated to the materials provided by the vendor.

B. To What Extent Are They Enforceable on Private Projects

1. Prime Contracts

In the absence of explicit payment terms between a contractor and subcontractor, every prime contract is deemed as a matter of statute to incorporate a provision requiring that the contractor pay its subcontractors and vendors within fifteen days after the contractor is paid by the owner for the subcontractor’s work or the vendor’s materials. See Conn. Gen. Stat. § 42-158j(a)(2). A contractor is barred by statute from withholding payment from a subcontractor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). There is no case law construing the statutory payment clause under circumstances where the owner delays payment to the contractor for reasons unrelated to the work performed or services provided by a particular subcontractor. To the extent that there is a contractual “pay-if-paid” clause, the Connecticut courts may require payment to the subcontractor within a reasonable time frame of when the subcontractor should have been paid, irrespective of whether the contractor has been paid by the owner for the subcontractor’s work. R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001). See DeCarlo & Doll. Inc. v. Dilozir (45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc., 239 Conn. 708 (1997).

2. Subcontracts

In the absence of explicit payment terms between a contractor and subcontractor, every subcontract is deemed as a matter of statute to incorporate a provision requiring that the subcontractor pay its sub-subcontractors and vendors within fifteen days after the subcontractor is paid by the contractor for the subcontractor’s work or the vendor’s materials. See Conn. Gen. Stat. § 42-15 8j(a)(2). A subcontractor is barred by statute from withholding payment from a sub-subcontractor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). To the extent that there is a contractual “pay-if-paid” clause, the Connecticut courts may require payment to the sub-subcontractor within a reasonable time frame of when the sub-subcontractor should have been paid, irrespective of whether the subcontractor has been paid by the contractor for the sub-subcontractor’s work. R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001). See DeCarlo & Doll, Inc. v. Dilozir, 45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc. 239 Conn. 708 (1997).

3. Vendor

In the absence of explicit payment terms between a contractor and vendor or a subcontractor and vendor, every prime contract and subcontract is deemed as a matter of statute to incorporate a provision requiring that the contractor pay its vendors and the subcontractor pay its vendors within fifteen days after the contractor is paid by the owner or the subcontractor is paid by the contractor for the vendor’s materials. See Conn. Gen. Stat. § 42-158j(a)(2). A contractor or subcontractor is barred by statute from withholding payment from a vendor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). There is no case law construing the statutory payment clause under circumstances where payment by the owner for the materials is delayed to the contractor for reasons unrelated to the materials furnished to the contractor by the vendor. To the extent that there is a contractual “pay-if-paid” clause, the Connecticut courts may require payment to the vendor within a reasonable time frame of when the vendor should have been paid. R&L Acoustics v. Liberty Mutual Insurance Co. 2001 Conn. Super. Lexis 2854 (September 21, 2001). See DeCarlo & Doll. Inc. v. Dilozir. 45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc., 239 Conn. 708 (1997).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

1. Prime

Under Conn. Gen. Stat. § 49-41a (a)(1), every public works contract in an amount in excess of $50,000 is deemed as a matter of law to incorporate a provision requiring the contractor to pay its subcontractors for amounts included on the contractor’s payment application to the owner within thirty days after the public owner has submitted payment to the contractor for the particular payment application. There is no case law construing the statutory payment clause under circumstances where payment by the owner is delayed to the contractor for reasons unrelated to the work performed or services provided by a particular subcontractor. For consideration of this issue in regard to a contractual payment clause, See S&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21, 2001).

2. Subcontracts

Under Conn. Gen. Stat. § 49-41a (a)(2), every subcontract issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the subcontractor to pay its sub-subcontractors for amounts paid by the contractor to the subcontractor for the sub-subcontractor’s work within thirty days after the contractor has paid the subcontractor for the sub-subcontractor’s work. There is no case law construing the statutory payment clause under circumstances where payment by the contractor is delayed to the subcontractor for reasons unrelated to the work performed or services provided by a particular sub-subcontractor. For consideration of this issue in regard to a contractual payment clause. See R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001).

3. Vendors

It appears that the terms of Conn. Gen. Stat. § 49-41a (a)(1) and (2) are fully applicable to agreements between vendors and contractors or subcontractors. See Connecticut Electric Equipment Co. v. Fidelity & Guaranty Insurance Co. 2002 Conn. Super. Lexis 3410 (2002). Assuming that this is the case: (a) every vendor agreement with a contractor issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the contractor to pay its vendors for amounts included on the contractor’s payment application to the owner within thirty days after the public owner has paid the contractor for the particular payment application; and (b) every vendor agreement with a subcontractor issued in connection with a “$50,000+” public works contract is deemed as a matter of law to incorporate a provision requiring the subcontractor to pay its vendors for amounts paid by the contractor to the subcontractor for the vendor’s materials within thirty days after the contractor has paid the subcontractor for the materials. There is no case law construing the statutory payment clause under circumstances where payment by the contractor is delayed to the subcontractor for reasons unrelated to the material provided by the vendor.

B. To What Extent are They Enforceable on Private Projects

1. Prime Contracts

It the absence of explicit payment terms between a contractor and subcontractor, every prime contract is deemed as a matter of statute to incorporate a provision requiring that the contractor pay its subcontractors and vendors within fifteen days after the contractor is paid by the owner for the subcontractor’s work or the vendor’s materials. See Conn. Gen. Stat. § 42-158j(a)(2). A contractor is barred by statute from withholding payment from a subcontractor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). There is no case law construing the statutory payment clause under circumstances where payment by the owner is delayed to the contractor for reasons unrelated to the work performed or services provided by a particular subcontractor. To the extent that there is a contractual “pay-when-paid” clause, the Connecticut courts may require payment to the subcontractor within a reasonable time frame of when the subcontractor should have been paid. R&L Acoustics v. Liberty Mutual Insurance Co., 2001 Conn. Super. Lexis 2854 (September 21,2001). See DeCarlo & Doll. Inc. v. Dilozir, 45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc., 239 Conn. 708 (1997).

2. Subcontracts

In the absence of explicit payment terms between a contractor and subcontractor, every subcontract is deemed as a matter of statute to incorporate a provision requiring that the subcontractor pay its sub-subcontractors and vendors within fifteen days after the subcontractor is paid by the contractor for the subcontractor’s work or the vendor’s materials. See Conn. Gen. Stat. § 42-158j(a)(2). A subcontractor is barred by statute from withholding payment from a sub-subcontractor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). To the extent that there is a contractual “pay-when-paid” clause, the Connecticut courts may require payment to the sub-subcontractor within a reasonable period of time of when the sub-subcontractor should have been paid. R&L Acoustics v. Liberty Mutual Insurance Co.. 2001 Conn. Super. Lexis 2854 (September 21,2001). See DeCarlo & Doll. Inc. v. Dilozir. 45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc., 239 Conn. 708 (1997).

3. Vendor

In the absence of explicit payment terms between a contractor and vendor or a subcontractor and vendor, every prime contract and subcontract is deemed as a matter of statute to incorporate a provision requiring that the contractor pay its vendors and the subcontractor pay its vendors within fifteen days after the contractor is paid by the owner or the subcontractor is paid by the contractor for the vendor’s materials. See Conn. Gen. Stat. § 42-158j(a)(2). A contractor or subcontractor is barred by statute from withholding payment from a vendor because of a dispute with another contractor, subcontractor or vendor. See Conn. Gen. Stat. § 42-158j(c). There is no case law construing the statutory payment clause under circumstances where payment by the owner for the vendor’s materials is delayed to the contractor for reasons unrelated to the materials furnished to the contractor by the vendor. To the extent that there is a contractual “pay-if-paid” clause, the Connecticut courts may require payment to the vendor within a reasonable period of time of when the subcontractor should have been paid. R&L Acoustics v. Liberty Mutual Insurance Co 2001 Conn. Super. Lexis 2854 (September 21, 2001). See DeCarlo & Doll. Inc. v. Dilozir, 45 Conn. App. 633, 642-43 (1997). Compare Blakeslee Arpaia Chapman. Inc. v. EL Constructors. Inc., 239 Conn. 708 (1997).

III. TRUST FUND STATUTES

Connecticut does not have a construction trust fund statute.

DELAWARE

Robert A. Forsten, Esquire

Klett Rooney Lieber & Schorlin

P.O. Box 1397

Wilmington, DE 19899-1397

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-if-paid” provisions are not enforceable in Delaware on private projects. Del. Code Ann. tit. 6, § 3507(e). Subsection (f) of section 3507 states that section 3507 does not apply to public projects. There is no case law construing these statutory provisions, which were only adopted in 2002.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Del. Code Ann. tit. 6, § 3507 does not prohibit “pay-when-paid” language; however, inasmuch as “pay-if-paid” language is prohibited, presumably a Court will hold that “pay-when-paid” only implies a reasonable time for payment, but payment must ultimately be made. Again, note that subsection (f) of section 3507 states that section 3507 does not apply to public projects. Note again also that section 3507 was only adopted in 2002 and to date there is no case law construing its provisions.

III. TRUST FUND STATUTES

Delaware has a construction trust fund statute that appears to apply to all types of projects. Del Code Ann. tit. 6, § 3502. The statute applies to any contractor, subcontractor, or any other person who enters into contract to supply labor or materials. The statute doesn’t apply to owners. The statute applies to funds received. Violation of the statute can result in interest penalties, Del. Code Ann. tit. 6, § 3506, and a violator may also be subject to criminal fines and possible imprisonment, Del Code Ann. tit. 6, § 3505. If a payment is not withheld “in good faith for reasonable cause,” then a court may also award reasonable attorneys’ fees. There are no restrictions or limitations on commingling under the statute.

DISTRICT OF COLUMBIA

Robert F. Carney, Esquire

Adam Cizek, Esquire

Whiteford, Taylor & Preston L.L.P.

7 Saint Paul Street

Baltimore, Maryland 21202

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

In the only treatment of “pay-when-paid” and “pay-if-paid” clauses under the law of the District of Columbia, the court assumed but did not decide that a “pay-if-paid” clause was enforceable. See Urban Masonry Corp. v. N&N Contractors, Inc., 676 A.2d 26 (D.C. 1996). The court went on to hold that the clause did not prevent the subcontractor from recovering interest under the facts presented.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

In the only treatment of “pay-when-paid” and “pay-if-paid” clauses under the law of the District of Columbia, the court assumed but did not decide that a “pay-if-paid” clause was enforceable. See Urban Masonry Corp. v. N&N Contractors, Inc., 676 A.2d 26 (D.C. 1996). The court went on to hold that the clause did not prevent the subcontractor from recovering interest under the facts presented.

III. TRUST FUND STATUTES

The District of Columbia does not have a construction trust fund statute.

FLORIDA

George J. Meyer, Esquire

Carlton Fields P.A.

777 S. Harbour Island Blvd.

Tampa, FL 33602-5950

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

In Florida, there is no bright line separating “pay-when-paid” and “pay-if-paid” decisions. See Kriksev & Brown. The “Pay-When-Paid”/”Pay-If-Paid” Dichotomy and the Florida Trilogy - Bright Line or Murky Fog?, 11 The Constr. Law 8 (Oct. 1991). Both types of payment provisions are enforceable in Florida although such provisions are generally referred to only as “pay-when-paid” clauses. As a general rule, provisions attempting to shift risk of non-payment to the subcontractor so that the subcontractor is not entitled to receive any payment at all until the general contractor is paid by the owner must be clear and unambiguous to be enforceable. Any ambiguity in such provisions is resolved against the general contractor and interpreted as establishing a reasonable time for the general contractor to pay the subcontractor even if the general contractor has not received payment from the owner.

There are no Florida statutes or any case law specifically prohibiting “pay-if-paid” clauses. However, as a general presumption, “the intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay the subcontractors.” Peacock Constr. Co., Inc. v. Modem Air Conditioning, Inc., 353 So.2d 840, 842 (Fla. 1977). Pay-if-paid provisions, sometimes referred to as contingent pay provisions, are enforceable in Florida to the extent such provisions clearly and unambiguously express the intention that payment to the subcontractor is not earned and is not payable at all unless the condition precedent of the general contractor’s receipt of payment from the owner is first satisfied. Moreover, the burden of expressing such clear intention to shift the risk of payment is on the general contractor and any ambiguities are resolved against the contractor. DEC Electric. Inc v. Raphael Constr. Corp., 558 So.2d 427 (Fla. 1990); Robert F. Wilson. Inc. v. Post-Tensioned Structures. Inc., 522 So.2d 79 (Fla. 3d DCA 1988); Peacock Constr. v. Modern Air Conditioning, Inc., 353 So.2d 840 (Fla. 1977); Snead Constr. Corp. v. Langerman, 369 So.2d 591 (Fla. 1st DCA 1978); Aetna Casualty & Sur. Co. v. Warren Bros., 355 So.2d 785 (Fla. 1978); Charles R. Pen-v Constr., Inc. v. C. Barry Gibson & Assoc., 523 So.2d 1221 (Fla. 1st DCA 1988); Team Land Dev. Inc. v. Anzac Contractors, Inc., 811 So.2d 698 (Fla. 3d DCA 2002).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Pay-when-paid clauses are enforceable in Florida. Where such clause exists, the subcontractor is entitled to payment after a reasonable time even if the general contractor has not received payment from the owner, so long as the reason for nonpayment is not the fault of the subcontractor. Peacock Constr. Co. v. Modem Air Conditioning. Inc., 353 So.2d 840 (F1a. 1977). Any ambiguities in a contract provision where a general contractor has attempted to shift the risk of nonpayment onto the subcontractor will be resolved against the general contractor and such provision will generally be deemed a “pay-when-paid” or “time of payment” clause and interpreted as establishing a “reasonable time” for the general contractor to pay the subcontractor. G.E.L. Recycling. Inc. v. Atlantic Env., Inc., 821 So.2d 431 (Fla. 5th DCA 2002); Harris Air Systems, Inc. v. Gentrac, Inc. 578 So.2d 879 (Fla. 1st DCA 1991); OBS Co.. Inc. v. Pace Constr. Corp., 558 So.2d 404 (Fla. 1990); Snead Constr. Corp. v. Langerman, 369 So.2d 591 (Fla. 1st DCA 1978); Peacock Constr. v. Modern Air Conditioning, Inc., 353 So.2d 840 (Fla.

1977).

Under section 713.245(1), Fla. Stat. (2003), a general contractor can provide a conditional bond which limits the contractor’s (and its surety’s) obligation to pay the subcontractor until the general contractor receives payments from the owner. Such bonds have been described as “pay-when-paid” bonds. WMS Constr., Inc v. Palm Springs Mile Assoc., LTD., 762 So.2d 973 (Fla. 3d DCA 2000). However, in order for a surety to restrict its duty to pay lienors under section 7 13.245, the contractor must have a valid “pay-when-paid” clause in all its subcontracts. North American Specialty Ins. Co. v. Hughes Supply, Inc., 705 So.2d 616 (Fla. 4th DCA 1998). [Note: the courts referred to the bonds as pay-when-paid, but such bonds are understood to mean “pay-if-paid” bonds.]

Under Chapter 255, Florida Statutes (2003), sureties cannot issue conditional payment bonds for public projects. Because a conditional payment bond cannot be used on a public project, a surety cannot raise the “pay-if-paid” defense. Everett Painting Co., Inc. v. Padula & Wadsworth Constr., 856 So.2d 1059 (Fla. 4th DCA 2003).

III. TRUST FUND STATUTES

Florida is not a trust find state per se, except for the limited purpose concerning insurance proceeds as provided in section 713.32, Fla. Stat. (2003). Section 713.32 states that any insurance proceeds payable to the owner or a lienor because of fire or other insured casualty are liable to liens or demands for payment for labor, services, or materials furnished. The named insured who receives any such insurance proceeds is considered a trustee of those proceeds and such proceeds are deemed trust funds for the purposes of this section for one year from the date of receipt of the proceeds.

Chapter 713 governs only private projects. Even though Florida is not considered a “trust” state, there are provisions in Chapter 713 that mandate proper disbursement of payments. For example, section 713.345 provides that any person or entity that receives any payment on account of improving real property must pay all undisputed amounts that are due for services, labor, or materials. Anyone who fails to pay the undisputed amounts due and owing is guilty of a felony.

Additionally, under section 713.246, any person or entity that fails to pay undisputed obligations for labor, services, or materials within 30 days entities any person providing such labor, services, or materials to file a verified complaint. The section further explains the remedies available for the person providing the labor, services, or materials to the extent of the undisputed amount due. The prevailing party in any proceeding under section 713.346 is entitled to recover costs including reasonable attorneys’ fees.

Section 713.31 further provides legal recourse against anyone that attempts by fraud or collusion to deprive any lienor of its benefits or rights.

GEORGIA

Frank Beacham, Esquire

Griffin, Cochrane & Marshall

127 Peachtree Street, N.E., 14th Floor

Atlanta, GA 30303-1530

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Generally speaking, the law is unsettled in Georgia in terms of cases explicitly addressing “pay-if-paid” provisions. The general rule in Georgia regarding conditions, however, is: “‘When the existence of a debt is conditional on the happening of some event, payment cannot be enforced until that event happens; but when payment of an existing liability is postponed until the happening of an event which does not happen, payment must be made within a reasonable time.’” Rosing v. Dwoskin Decorating Co., 141 Ga. App. 617, 619, 234 S.E.2d 128, 130 (1977) (quoting MacLeod v. Belvedale, Inc., 115 Ga. App. 444, 446, 154 S.E.2d 756, 759 (1967)).

Based on that language, a Georgia court would probably find that a “pay-if-paid” clause is only enforceable for “a reasonable time.”

The language cited below under “pay-when-paid,” however, certainly does not make this distinction.

B. To What Extent Are They Enforceable on Private Projects

No distinction has been drawn in Georgia cases between public or private projects. Nor has any distinction been made between prime contracts, subcontracts, and contracts with vendors.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Although no Georgia cases specifically hold that a “pay-when-paid” clause is enforceable, the cases can certainly be read to endorse the concept, and a Georgia federal case and a North Carolina federal case both state that “pay-when-paid” clauses are enforceable in Georgia. The language those cases rely on is:

A provision in a contract may make payment by the owner a condition precedent to a subcontractor's right to payment if ‘the contract between the general contractor and the subcontractor should contain an express condition showing that to be the intention of the parties’. ...The condition is clearly expressed in this subcontract.

St. Paul Fire & Marine Ins. Co. v. Georgia Interstate Elec. Co., 187 Ga. App. 579, 370 S.E.2d 829, 830-31 (1988). See also Assoc. Mechanical Corp., Inc. v. Martin K. Eby Const. Co., Inc., 67 F.Supp.2d 1375, 1378 (M.D. Ga. 1999) (“Georgia law provides that no payment is due a subcontractor where a subcontract was conditioned upon the receipt of payment by contractor from the owner.”) (citing, Peacock Const. Co., 142 S.E.2d at 333, overruled on other grounds by Olympic Const., Inc. v. Drywall Interiors, Inc., 180 Ga. App. 142, 348 S.E.2d 688 (1986), as holding a “pay-when-paid” clause to be a condition precedent); Statesville Roofing & Heating Co., Inc. v. Duncan, 702 F.Supp. 118, 120-21 (W.D.N.C. 1988) (“Georgia has a long line of cases holding that “pay-when-paid” clauses in written contracts must be taken literally”).

B. To What Extent Are They Enforceable on Private Projects

No distinction has been drawn in George cases between public or private projects. Nor has any distinction been made between prime contracts, subcontracts, and contracts with vendors.

III. TRUST FUND STATUTES

Georgia does not have a construction trust fund statute. However, Georgia has a criminal statute that makes it a crime for a contractor that has been paid by the owner to fail to pay for labor, services, or material while any amount for which the contractor is liable for such labor, services, or materials remains unpaid. Ga. Code Ann. § 16-8-15. Further, Georgia has recognized a constructive trust fund in narrow circumstances: “Georgia law recognizes the constructive trust fund doctrine with respect to payments owed materialmen by their contractors for improvements made to a third party’s realty,” but only to the extent that payments do not exceed amounts owing to materialmen, and that payments are made to the general contractors at time when materialmen have either a valid lien on the owner’s property or a right to file lien. See Bethlehem Steel Corp. v. Tidwell, 66 B.R. 932, 939-40 (M.D. Ga. 1986).

HAWAII

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The Hawaii courts have not addressed the issue of “pay-if-paid” provisions.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The Hawaii courts have not addressed the issue of “pay-when-paid” provisions.

III. TRUST FUND STATUTES

Hawaii does not have a construction trust fund statute.

IDAHO

Phillip C. Storti, Esquire

Tom Mortell, Esquire

Hawley, Trooxel Ennis & Hawley LLP

877 W. Main Street, Suite 1900

Boise, ID 83702-7705

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The enforceability of “pay-if-paid” clauses in construction contracts on public and private projects has not been addressed by Idaho courts.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The enforceability of “pay-when-paid” clauses in construction contracts on public and private projects has not been addressed by Idaho courts.

III. TRUST FUND STATUTES

Idaho does not have a construction trust fund statute.

ILLINOIS

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

While Illinois will enforce “pay-when-paid” and “pay-if-paid” clauses, see A.A. Conte, Inc. v. Campbell-Lawrie-Lautermilch Corp., 477 N.E.2d 30, 33 (Ill. App. 1985), these will not serve as defenses to mechanics’ lien actions, 770 Ill. Comp. Stat. 60/21, or payment bond actions, Brown & Kerr, Inc. v. St. Paul Fire & Marine Ins. Co., 940 F. Supp. 1245, 1250 (N.D. Ill. 1996).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

While Illinois will enforce “pay-when-paid” and “pay-if-paid” clauses, see A.A. Conte, Inc. v. Campbell-Lawrie-Lautermilch Corp., 477 N.E.2d 30, 33 (Ill. App. 1985), these will not serve as defenses to mechanics’ lien actions, 770 Ill. Comp. Stat. 60/21, or payment bond actions, Brown & Kerr, Inc. v. St. Paul Fire & Marine Ins. Co., 940 F. Supp. 1245, 1250 (N.D. Ill. 1996).

III. TRUST FUND STATUTES

Illinois has a construction trust statute, but it is only applicable to projects on which lien waivers are required. 770 ILCS 60/21.02. The statute provides that where an owner, contractor, subcontractor, or supplier of any tier requires the execution of a lien waiver from any person supplying labor or materials to a project governed by the mechanics’ lien law, any earned but unpaid funds for work for which the lien was waived are held in trust for the party executing the waiver.

INDIANA

Terrence L. Brookie, Esquire

Locke Reynolds, LLP

1000 Capital Center S

201 N. Illinois Street

Indianapolis, IN 66204-4210

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

There is no Indiana statute addressing this issue. There is also a dearth of case law on point. However, Midland Engineering Co., et al. v. John A. Hall Constr. Co. and United States Fidelity & Guaranty Co., 398 F.Supp. 981 (N.D. Ind. 1975) is widely accepted as establishing that “pay-if-paid” and “pay-when-paid clauses are not enforceable in Indiana. The contract clause at issue in Midland read:

...the last payment, which the said contractor shall pay to said subcontractor immediately after said material and labor installed by said subcontractor to have been completed, approved by said architect, and final payment received by the contractor...” Id. at 993.

The court rejected contractor’s claim that it was not obligated to pay its subcontractor until such time as it received payment from the owner. The court opined that:

Clauses such as Paragraph 15 are not intended to provide the contractor with an eternal excuse for nonpayment. They have been construed by the courts on several occasions to simply provide the contractor with a reasonable time within which to obtain payment from the owner before he is contractually bound to the subcontractors for immediate payment. Id. at 993.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

There is no Indiana statute addressing this issue. There is also a dearth of case law on point. However, Midland Engineering Co., et al. v. John A. Hall Constr. Co. and United States Fidelity & Guaranty Co.. 398 F.Supp. 981 (N.D. Ind. 1975) is widely accepted as establishing that “pay-if-paid” and “pay-when-paid” clauses are not enforceable in Indiana. The contract clause at issue in Midland read:

...the last payment, which the said contractor shall pay to said subcontractor immediately after said material and labor installed by said subcontractor to have been completed, approved by said architect, and final payment received by the contractor... Id. at 993.

The court rejected contractor’s claim that it was not obligated to pay its subcontractor until such time as it received payment from the owner. The court opined that:

Clauses such as Paragraph 15 are not intended to provide the contractor with an eternal excuse for nonpayment. They have been construed by the courts on several occasions to simply provide the contractor with a reasonable time within which to obtain payment from the owner before he is contractually bound to the subcontractors for immediate payment. Id. at 993.

III. TRUST FUND STATUES

Indiana does not have a trust fund statute.

IOWA

Paul D. Burns, Esquire

Bradley & Riley, PC

One South Gilbert Street

Iowa City, IA 52240-3914

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

In Grady v. S.E. Gustafson Constr. Co., 251 Iowa 1242, 103 N.W.2d 737 (1960), the Supreme Court of Iowa addressed a contingent payment provision the defendant contractor alleged was a “pay-if-paid” provision. Id. at 1245, 103 N.W.2d at 739. The Court ultimately held that the plaintiff subcontractor was entitled to payment within a reasonable amount of time after it completed its labor as the defendant contractor was responsible for the non-payment of the owner in that the general contractor was refusing to accept final payment from the owner in order to preserve a claim against the owner unrelated to the plaintiff subcontractor’s claim. Id. at 1245-46, 103 N.W.2d at 739. Some of the language in the Court’s opinion could arguably be interpreted as recognizing the enforceability of “pay-if-paid” provisions. Id. at 1246, 103 N.W.2d at 739. There is also one unreported decision of the Iowa Court of Appeals that addressed a “pay-if-paid” contract clause on a private construction project between a general contractor and a sub-contractor, Booth v. Pilot Corp., 2001 WL 726364 (Iowa Ct. App. June 29, 2001). The Iowa Court of Appeals found in Booth that the general contractor had in fact been paid by the owner, and therefore the “condition precedent” was satisfied. Id. at *4. No argument was raised that the “pay-if-paid” clause was unenforceable as a matter of public policy. Accordingly, the law in Iowa on these topics is “unsettled.”

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Based upon the Supreme Court of Iowa’s decision in Grady v. S.E. Gustafson Constr. Co., 251 Iowa 1242, 103 N.W.2d 737 (1960), Iowa courts will most likely enforce “pay-when-paid” provisions.

III. TRUST FUND STATUTES

Iowa does not have a construction trust fund statute.

KANSAS

Mark D. Hinderks, Esquire

Stinson Morrison Hecker LLP

P.O. Box 7979

Shawnee Mission, KS 66207

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

There do not appear to be any Kansas authorities addressing the issue. However, generally, in the absence of statutory provisions or recognized public policy to the contrary, Kansas decisions normally enforce contracts as written.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

There do not appear to be any Kansas authorities addressing the issue. However, generally, in the absence of statutory provisions or recognized public policy to the contrary, Kansas decisions normally enforce contracts as written. There is one unpublished federal court case in which a "pay when paid" clause was held not to be a condition precedent to a contractor's downstream payment obligation to a subcontractor, but only to have the effect of postponing the payment obligation for a reasonable period of time in which payment may be received from the owner, after which the contractor's obligation may be enforced notwithstanding non-payment by the owner. Shelley Electric, Inc. v. United States Fidelity & Guaranty Co., 1992 WL 31964 (D. Kan. Oct. 16, 1992).

III. TRUST FUND STATUTES

Kansas does not have a trust fund statute.

CWDDOCS 120491v1

KENTUCKY

Anne Ellen Gorham, Esquire

Stites & Harbison, PLLC

2300 Lexington Financial Center

Lexington, KY 40507-9411

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

No Kentucky case directly addresses them, but “pay-if-paid” clauses seem to be enforceable in the Kentucky as a matter of narrow contract interpretation and a matter of the parties’ intentions. See Dyer, 303 F.2d 655 at 660. Although not specifically addressing a “pay-if-paid” clause, Dyer seems to uphold the enforceability of such provisions by stating that they must be expressly and unambiguous stated. See id. If not so stated, the clause will be interpreted as a “pay-when-paid” provision that simply sets the time for performance. See id.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The law of Kentucky is sparse concerning this issue and does not seem to make a distinction between public or private contracts and subcontractors or vendors. However, Thos J. Dyer Co. v. Int’l Engineering Co., 303 F.2d 655 (6th Cir. 1962) addressed the effect and enforceability of a “pay-when-paid” clause in a Kentucky contract. The court held that “unless the contract shows clearly that such an action is an express condition,” (emphasis added) these clauses fix the time of payment. Id. at 660. They do not make payments by an owner to the general contractor a condition precedent to payment of subcontractors. Id. In other words, the clauses are simply treated as a promise to pay “within a reasonable time.” Id. Even if the general contractor is not paid, he or she still has the obligation to pay vendors and subcontractors. Id.

III. TRUST FUND STATUTES

Kentucky has not expressly created a statute providing for the creation of a trust fund for proceeds under construction contracts. However, Kentucky places a statutory obligation upon contractors to pay all suppliers of material or labor, including both vendors and subcontractors. Ky. Rev. Stat. Ann. § 376.070. This obligation extends to all situations when a mechanic’s or materialman’s lien may be filed, even if one has not yet been imposed. Id. One case applying Kentucky law has determined that the statute impliedly creates a trustee relationship. In Re D & B Electric, Inc., 4 B.R. 263 (Bankr. W.D. Ky. 1980). Later cases, however, have rejected this analysis. In Re Sigler, 196 B.R. 762 (Bankr. W.D. Ky. 1996); Kentucky v. Laurel County, 805 F.2d 628 (6th Cir. 1986).

LOUISIANA

Mark W. Mercante, Esquire

Shaw, Norton, Degan, LLP

No. 3 Sanctuary Blvd., Suite 201

Mandeville, LA 70471-3345

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Prime Contracts - No authority.

Subcontracts - No authority on point but presumably enforceable.

Vendors - No authority on point but presumably enforceable.

B. To What Extent Are They Enforceable on Private Projects

Prime Contracts - No authority.

Subcontracts - Enforceable. Imagine Constr., Inc. v. Centex Landis Constr. Co., Inc., 97-1653 (La. App. 4 Cir. 2/11/98), 707 So.2d 500.

Vendors - No authority on point but presumable enforceable.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

Prime Contracts - No authority.

Subcontracts - Enforceable. John F. Sanchez Plumbing Co., Inc. v. Aetna Cas.& Sur. Co., 564 So.2d 1302 (La. App. 1 Cir. 1990).

Vendors - No authority on point but presumably enforceable.

B. To What Extent Are They Enforceable on Private Projects

Prime Contracts - No authority.

Subcontracts - Enforceable. Southern States Masonry, Inc. v. J.A. Jones Constr. Co., 507 So.2d 198 (La. 1987).

Vendors - No authority on point but presumably enforceable.

III. TRUST FUND STATUTES

Louisiana does not have a construction trust fund statute.

MAINE

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Maine has not addressed the issue of the enforceability of “pay-if-paid” provisions in construction contracts on private or public projects.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS UNSETTLED

Maine has not addressed the issue of the enforceability of “pay-when-paid” provisions in construction contracts on private or public projects.

III. TRUST FUND STATUTES

Maine does not have a trust fund statute.

MARYLAND

Robert F. Carney, Esquire

Adam Cizek, Esquire

Whiteford, Taylor & Preston L.L.P.

7 Saint Paul Street

Baltimore, Maryland 21202

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-when-paid” and “pay-if-paid” clauses will generally be enforced under Maryland law. See Atlantic States Constr. Co. v. Drummond & Co., 251 Md. 77, 246 A.2d 251 (1968) (pay-when-paid clause); Gilbane Bldg. Co. v. Brisk Waterproofing Co., 86 Md. App. 21, 585 A.2d 248 (1991) (pay-if -paid clause). However, these clauses do not constitute defenses to mechanics’ lien, private bond, and Little Miller Act bond actions brought by subcontractors. See Md. Code Ann., Real Prop. § 9-113(b) (barring use of “pay-if-paid” or “pay-when-paid” clauses as waiver of right to mechanics’ lien or bond action on private property); Md. Code Ann., St. Fin. & Proc. 17-108(d)(2) (barring use of “pay-if-paid” or “pay-when-paid” clauses as waiver of rights under Little Miller Act).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-when-paid” and “pay-if-paid” clauses will generally be enforced under Maryland law. See Atlantic States Constr. Co. v. Drummond & Co., 251 Md. 77, 246 A.2d 251 (1968) (pay-when-paid clause); Gilbane Bldg. Co. v. Brisk Waterproofing Co., 86 Md. App. 21, 585 A.2d 248 (1991) (pay-if -paid clause). However, these clauses do not constitute defenses to mechanics’ lien, private bond, and Little Miller Act bond actions brought by subcontractors. See Md. Code Ann., Real Prop. § 9-113(b) (barring use of “pay-if-paid” or “pay-when-paid” clauses as waiver of right to mechanics’ lien or bond action on private property); Md. Code Ann., St. Fin. & Proc. 17-108(d)(2) (barring use of “pay-if-paid” or “pay-when-paid” clauses as waiver of rights under Little Miller Act).

III. TRUST FUND STATUTES

Maryland has a construction trust law, Md. Code Ann., Real Prop. §§ 9-201, et seq. It requires that any funds paid under a contract by an owner to a contractor or by an owner or contractor to a subcontractor shall be held in trust for those subcontractors who did the work or furnished the materials for purposes of paying those subcontractors. Md. Code Ann., Real Prop. § 9-201. The trust nature of the funds extends to the benefit of lower tiers of subcontractors. Id. The law applies to private projects and to those under the Little Miller Act, but not to federal projects within the state or single home residential contracts. Md. Code Ann., Real Prop. § 9-204; United States ex rel. Allied Bldg. Prods. Corp. v. Federal Ins. Co., 729 F. Supp. 477, 478 (D. Md. 1991).

MASSACHUSETTS

Bradford R. Carver, Esquire

Cetrulo & Capone, LLP

Two Seaport Lane

Boston, MA 02210-2037

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

1. Non-Filed Sub-bidders

The Massachusetts public construction statutes require that seventeen separate sub-trades must file their sub-bids directly with the owner. See Mass. Gen. Laws Ch. 149, § 44F(1). As a general proposition, if a subcontractor on a public project is not a “filed sub-bidder,” its relation with the general contractor is essentially the same as on a private project. This analysis could be altered if a public owner “approved in writing” a non-filed sub-bidder, in which case the subcontractor would be treated as a statutory subcontractor. Absent such approval, however, it is likely that the relations between non-filed sub-bidders and a general contractor will be treated the same as private contracts.

2. Filed Sub-bidder

Mass. Gen. Laws Ch. 149, § 44F provides a statutory form of subcontract for filed sub-bidders on public projects. Mass. Gen. Laws Ch. 30, § 39F governs the manner in which subcontractors receive periodic and final payments on public projects. While there appears to be no reported decision on the issue, with regard to periodic payments, it has been argued that the language of Mass. Gen. Laws Ch. 30, § 39F itself operates as a “pay-when-paid” provision. See Mass. Gen. Laws Ch. 30, §39F (“Forthwith after the general contractor receives payment on account of a periodic estimate, the general contractor shall pay to each subcontractor the amount paid for the labor performed and the materials furnished by that subcontractor....“). With regard to final payments, however, Bayer & Mingolla Industries, Inc. v. A.J. Orlando Contracting Co., Inc., 6 Mass. App. Ct. 1, 370 N.E.2d 1381 (1978) holds that release of retainage on a public project is not contingent upon final payment from the owner.

B. To What Extent Are They Enforceable on Private Projects

“Pay-when-Paid”/”Pay-if-Paid” provisions are enforceable on private projects where the contractual language contains a “clear provision that payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner.” A.J. Wolfe Co. v. Baltimore Contractors, Inc., 355 Mass. 361, 244 N.E.2d 717 (1969); Bayer & Mingolla Industries, Inc. v. A.J. Orlando Contracting Co., Inc., 6 Mass. App. Ct. 1, 370 N.E.2d 1381 (1978) (reaffirming holding in Wolfe that to be enforceable a “pay-if-paid” provision must be stated as a clear condition precedent); Canam Steel Corp. v. Bowdoin Construction Corp. 34 Mass. App. Ct. 943, 613 N.E.2d 121 (1993) (“A provision tying payment to a subcontractor to receipt of payment by the general contractor from the owner is, however, not effective unless that contingency is very clearly expressed”); Framingham Heavy Equipment Co., Inc. v. John T. Callahan & Sons, Inc., 61 Mass. App. Ct. 171,807 N.E.2d 851 (2004) (same).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

The Massachusetts public construction statutes require that seventeen separate sub-trades must file their sub-bids directly with the owner. See Mass. Gen. Laws Ch. 149, § 44F(1). As a general proposition, if a subcontractor on a public project is not a “filed sub-bidder,” its relation with the general contractor is essentially the same as on a private project. This analysis could be altered if a public owner “approved in writing” a non-filed sub-bidder, in which case the subcontractor would be treated as a statutory subcontractor. Absent such approval, however, it is likely that the relations between non-filed sub-bidders and a general contractor will be treated the same as private contracts. See II. B., infra

Mass. Gen. Laws Ch. 149, § 44F provides a statutory form of subcontract for filed sub-bidders on public projects. Mass. Gen. Laws Ch. 30, § 39F governs the manner in which subcontractors receive periodic and final payments on public projects. While there appears to be no reported decision on the issue, with regard to periodic payments, it has been argued that the language of Mass. Gen. Laws Ch. 30, § 39F itself operates as a “pay-when-paid” provision. See Mass. Gen. Laws Ch. 30, §39F (“Forthwith after the general contractor receives payment on account of a periodic estimate, the general contractor shall pay to each subcontractor the amount paid for the labor performed and the materials furnished by that subcontractor....“). With regard to final payments, however, Bayer & Mingolla Industries, Inc. v. A.J. Orlando Contracting Co., Inc., 6 Mass. App. Ct. 1, 370 N.E.2d 1381 (1978) holds that release of retainage on a public project is not contingent upon final payment from the owner.

B. To What Extent Are They Enforceable on Private Projects

“Pay-when-paid” provisions are enforceable on private construction projects. See A.J. Wolfe Co. v. Baltimore Contractors, Inc., 355 Mass. 361, 244 N.E.2d 717 (1969).

III. TRUST FUND STATUTES

Massachusetts does not have a trust fund statute.

MICHIGAN

James R. Case, Esquire

Kerr, Russell and Weber, PLC

500 Woodward Avenue, Suite 2500

Detroit, MI 48226-5499

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

In Berkel & Co. v. Christman Co., 533 NW.2d 838 (1995), the Michigan Court of Appeals, in interpreting a “pay-when-paid” clause in the contract between Christman Company and its subcontractor Berkel & Company Contractors (“Berkel”), affirmed the trial court’s decision that Christman Company was not required to pay Berkel until it received payment from the owner. In so holding, the court looked to the language of the contract and determined that the receipt of payment by Christman Company from the owner was a condition precedent to payments to the subcontractor. The court also rejected Berkel’s argument that the “pay-when-paid” clause merely postponed payment for a reasonable amount of time finding that the contract contained no language limiting the condition precedent.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Based upon the Court’s holding in Christman Co., supra, Michigan courts will most likely enforce “pay-when-paid” provisions on public and private construction projects.

III. TRUST FUND STATUTES

Michigan has a construction trust fund statute, The Michigan Building Contract Fund Act, Mich. Comp. Laws Ann. § 570.151, et seq. (the “MBCFA”). The MBCFA does not apply to public construction projects. In re Certified Question, 411 Mich 727; 311 NW.2d 731 (1981). The MBCFA is for “the benefit of the person making the payment, contractors, laborers, subcontractors or materialmen.” Mich. Comp. Laws Ann. § 570.151. The MBCFA applies only to laborers, subcontractors and materialmen that contracted directly with the contractor or subcontractor who is acting as the trustee. Mich. Comp. Laws Ann. § 570.151; KMH Equip. Co. v Chas J Rogers, Inc., 104 Mich. App. 563; 305 NW.2d 266 (1981). Equipment lessors are not protected under the MBCFA. KMH Equip. Co. v Chas J Rogers, Inc., 104 Mich. App. 563; 305 NW2d 266 (1981). The MBCFA provides that the contract funds paid by any person to a contractor, or by such person or contractor to a subcontractor are trust funds. Mich. Comp. Laws Ann. §570.151. The MBCFA does not impose a trust upon funds held by the owner. Renshaw v Samuels, 117 Mich. App. 649; 324 NW2d 117 (1982).

The MBCFA imposes civil liability for violation of the statute. See People v Whipple, 202 Mich App 428; 509 NW2d 837 (1993), James Lumber Co., Inc. v J & S Constr., Inc., 107 Midi. App. 793; 309 N.W.2d 925 (1981). The MBCFA also imposes criminal liability for violation of the statute, Mich. Comp. Laws Ann. § 570.152, and personal liability where a defendant personally mis-appropriated the funds after they have been received by the corporation. People v Brown, 239 Mich. App. 735; 610 N.W.2d 234 (2000). Nothing in the MBCFA prohibits a trustee from commingling.

MINNESOTA

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-if-paid” provisions are enforceable under Minnesota law; however, the language of such provisions must clearly, unequivocally and unambiguously shift the risk of the owner’s insolvency to the subcontractor in order for the provisions to be enforced. See Mrozik Constr., Inc. v. Lovering Assoc., Inc., 461 N.W.2d 49, 52 (1990).

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-when-paid” provisions are enforceable under Minnesota law. See Mrozik Constr., Inc. v. Lovering Assoc., Inc., 461 N.W.2d 49, 51 (1990).

III. TRUST FUND STATUTES

Minnesota has a construction trust fund statute that applies to “payments received by any person contributing to an improvement to real estate within the meaning of section 514.01 shall be held in trust by that person for the benefit of those persons who furnished the labor, skill, material, or machinery contributing to the improvement.” Minn. Stat. Ann. § 514.02 (2003). If a person uses trust funds knowing that the funds are owed to a supplier of labor or material and if the person has not provided the person making payment a valid lien waiver in accordance with Minn Stat. Ann. § 514.07, or has not furnished the person making payment with a payment bond in the basic amount of the contract price, such person is guilty of theft. If the misappropriate of trust funds is related to residential real estate, a “shareholder, officer, director, or agent of a corporation who is responsible for the theft shall be guilty of theft of the proceeds.” Minn. Stat. Ann. § 514.02 (2003). A person injured by a misappropriation of trust funds may bring a civil action for “costs, disbursements, including costs of investigation and reasonable attorney’s fees” and may receive other relief as determined by the court. Minn. Stat. Ann. § 514.02 (2003).

MISSISSIPPI

Cheri T. Gatlin, Esquire

Ott & Turnage, PA

P.O. Box 1079

Jackson, MS 39215

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

“Pay-if-Paid” and “Pay-When-Paid” clauses generally are not an issue on public projects in Mississippi. For all public projects over $50,000, Mississippi law requires that a payment and performance bond be posted by the general contractor. Under Mississippi’s “Little Miller Act,” the payment bond covers all subcontractors and vendors through the second tier - those who have a contractual relationship with the prime contractor or with a subcontractor of the prime contractor. Miss. Code Ann. § 31-5-51. Specifically, those covered are identified by the statute as follows:

(i) Subcontractors & Material Suppliers of the Contractor;

(ii) Subcontractor and Material Suppliers and Subcontractors of the Prime Contractor; and

(iii) Laborers who perform work at the Project Site.

With the payment bond in place, there should not be a non-payment issue due to lack of funds.

B. To What Extent Are They Enforceable on Private Projects

The seminal Mississippi case on “pay-when-paid” clauses is Nicholas Acoustics & Specialty Company v. H. M Construction Co., Inc., 695 F.2d 839 (5th Cir. 1983). In that case, the court found that the contractual documents were in conflict and construed them in favor of the unpaid subcontractor. The subcontract provided that the subcontractor would be paid when the contractor was paid. However, the General Contract between the owner and the contractor provided that the contractor would pay the subcontractors upon receiving a release of liens from the subcontractors. The court found that this created a classic “Catch 22” situation—”the owner will not pay until the subcontractors have been paid, and the subcontractors cannot be paid until the owner is paid.” These provisions were found to be conflicting. Accordingly, the United States Court of Appeals for the Fifth Circuit concluded that the “pay-when-paid” clause would be construed as allowing the contractor to delay payment to the subcontractors only for a reasonable time after the subcontractors completed their work.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

A. To What Extent are They Enforceable in Public Projects

“Pay-if-Paid” and “Pay-When-Paid” clauses generally are not an issue on public projects in Mississippi. For all public projects over $50,000, Mississippi law requires that a payment and performance bond be posted by the general contractor. Under Mississippi’s “Little Miller Act,” the payment bond covers all subcontractors and vendors through the second tier - those who have a contractual relationship with the prime contractor or with a subcontractor of the prime contractor. See Miss. Code Ann. § 31-5-51. Specifically, those covered are identified by the statute as follows:

(i) Subcontractors & Material Suppliers of the Contractor;

(ii) Subcontractor and Material Suppliers and Subcontractors of the Prime Contractor; and

(iii) Laborers who perform work at the Project Site.

With the payment bond in place, there should not be a non-payment issue due to lack of funds.

B. To What Extent Are They Enforceable on Private Projects

The seminal Mississippi case on “pay-when-paid” clauses is Nicholas Acoustics & Specialty Company v. H. M Construction Co., Inc., 695 F.2d 839 (5th Cir. 1983). In that case, the court found that the contractual documents were in conflict and construed them in favor of the unpaid subcontractor. The subcontract provided that the subcontractor would be paid when the contractor was paid. However, the General Contract between the owner and the contractor provided that the contractor would pay the subcontractors upon receiving a release of liens from the subcontractors. The court found that this created a classic “Catch 22” situation—”the owner will not pay until the subcontractors have been paid, and the subcontractors cannot be paid until the owner is paid.” These provisions were found to be conflicting. Accordingly, the United States Court of Appeals for the Fifth Circuit concluded that the “pay-when-paid” clause would be construed as allowing the contractor to delay payment to the subcontractors only for a reasonable time after the subcontractors completed their work.

III. TRUST FUND STATUTES

Mississippi is not a trust fund state. However, Mississippi does have prompt payment statutes for both public and private projects. Prompt payment is required by contractors to subcontractors on public contracts by Miss. Code Ann. § 31-5-27. Under the statute, the prime contractor on a public project must pay its subcontractor within 15 days of the prime contractor’s receipt from the public owner of that portion of payment, attributable to the subcontractor’s work.

Prompt payment is required by contractors to subcontractors on private projects by Miss. Code Ann. § 87-7-5. Contractors on private projects must pay their subcontractors and suppliers within 15 days of the prime contractor’s receipt of payment for the work completed by each subcontractor and supplier.

MISSOURI

Maura P. Kelly, Esquire

McCarthy Building Co., Inc.

1341 N. Rock Hill road

Saint Louis, MO 63124-1441

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-if-paid” claims are enforceable in both private and public construction contracts under Missouri law, but only if clear and unambiguous in both private and public, at least no distinction in case law. Latest case (Meco) makes it difficult to prove provision is unambiguous. Meco Sys., Inc. v. Dancing Bear Entertainment, Inc., 42 S.W.3d 794 (Mo. App. 1981); American Drilling v. City of Springfield, 614 S.W.2d 266 (Mo. App. 1981).

No distinction is made between primes, subs, suppliers or vendors. Again, if the “pay-if-paid” provision is clear and unambiguous, it should be enforceable. However, Missouri statute prohibits a waiver of mechanic’s lien rights or bond rights by the operation of a “pay-if-paid” clause. Mo. Rev. Stat. § 431.183.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

“Pay-when-paid” provisions are enforceable in both private and public construction contracts. If “pay-if-paid” provision is invalid due to ambiguity, then clause sets reasonable time (i.e., reverts to pay-when-paid). See Meco Sys., Inc. v. Dancing Bear Entertainment, Inc., 42 S.W.3d 794 (Mo. App. 1981); American Drilling v. City of Springfield, 614 S.W.2d 266 (Mo. App. 1981).

No distinction is made in case law as to prime contractors, subcontractors, suppliers or vendors.

III. TRUST FUND STATUTES

Missouri does not have a construction trust fund statute.

 

MONTANA

Buzz Tarlow, Esquire

Tarlow & Stonecipher, PLLC

1439 West Babcock

Bozeman, Montana 59715

I. ENFORCEABILITY OF “PAY-IF-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

The Montana Supreme Court has not addressed the issue of whether a “pay-if­-paid” clause or a “pay-when-paid” clause in a construction contract is enforceable, either with regard to public or private contracts. The Montana Legislature has, however, enacted several statutes that appear relevant to the issue of the enforceability of “pay-if-paid” and “pay-when-paid” clauses in construction contracts.

Section 28-2-723 of the Annotated Code of Montana suggests that “pay-if-paid” and “pay-when­-paid” provisions are enforceable under Montana law. Section 28-2-723 provides:

A construction contract may not contain provisions requiring a contractor, subcontractor, or material supplier to waive the right to a construction lien or a right to a claim against a payment bond before the contractor, subcontractor, or material supplier has been paid for the labor, materials, or both labor and materials, furnished by the contractor, subcontractor, or material supplier.

Although this statute has not been interpreted by the Montana Supreme Court, it appears to invalidate any contractual provision that waives a subcontractor’s lien rights except in such cases where the lien waivers are executed in conjunction with payment for work performed. Jurisdictions outside of Montana with anti-waiver statutes similar to Mont. Code. Ann. § 28-2-723 have utilized such statutes to strike down “pay-if-paid” and “pay­-when-paid” provisions, reasoning that both have the practical effect of acting as a waiver of lien rights, and therefore violate the public policy underlying the anti-waiver statutory provisions pertaining to mechanic’s liens. See Wm.R.Clarke Corp. v. Safeco Ins. Co. of America, 938 P.2d 372, 376-377 (Cal. 1997); Capitol Steel Fabricators, Inc. v. Mega Const. Co., Inc., 68 Cal.Rptr.2d 672, 680 (Cal.App.2.Dist., 1997); See also West-Fair Elec. Contractors v. Aetna Cas. & Sur. Co., 661 N.E.2d 967, 971 (N.Y.1995) (wherein the court held that a “pay-if-paid” provision is volatile of New York’s anti-waiver of mechanic’s lien statute). Despite the similarities of Montana’s anti-waiver statute to those found in California and New York, it is unclear whether the Montana Supreme Court will utilize Mont. Code. Ann. § 28-2-723 to find “pay-if-paid” and “pay-when-paid” provisions unenforceable.

II. ENFORCEABILITY OF “PAY-WHEN-PAID” CLAUSES IN CONSTRUCTION CONTRACTS

Other statutory sections provide conflicting authority regarding the enforceability of “pay-when-paid” provisions.

Montana statutes pertaining to construction contracts for residential and commercial projects over $400,000.00 also support the conclusion that “pay-if-paid” and “pay-when-paid” provisions would be unenforceable under Montana law. In particular, Mont. Code. Ann. § 28-2-2102 provides:

performance by a subcontractor of a subcontract entitles the subcontractor to payment from the contractor.

This statute appears to state that a subcontractor’s payment may not be contingent upon payment (or the timing of payment) by the owner to the subcontractor, but instead is due upon performance under the contract. Interestingly, however, at the same time that it enacted Mont. Code. Ann. § 28-2-723-2102 (providing that payment is collectable upon performance), the Montana Legislature enacted additional statutes related to the payment of general contractors and subcontractors that seem to indicate that “pay-when-paid” clauses may be valid and enforceable, with certain limitations. For example, Mont. Code. Ann. § 28-2-2103(2)(a) provides:

Within 7 days after a contractor receives a periodic or final payment from an owner or a state agency, the contractor shall pay the subcontractor, if any, the full amount due the subcontractor in accordan