This is a verbatim copy of Nate Budde’s piece entitled The Battle Between Policy and Contract which is published over on Construction Exec. All credit is attributed to both Nate Budde, the Chief Legal Officer over at Zlien and to Construction Exec where I found this via Scott Wolfe’s Google+ Page. Many of you know that Foreclosurepedia is an ADAMANT SUPPORTER of Zlien and are hopeful that you will consider them for ALL OF YOUR Lien needs!
The concept that subcontractors and suppliers (i.e., firms further down on the payment ladder) deserve to be protected from non-payment traces all the back way to Thomas Jefferson. The offshoot of the belief that the financial risk of non-payment shouldn’t fall on the lower-tiered parties is the corresponding belief that general contractors and property owners (those at the top end of the payment ladder) should be the ones to bear the burden of a project’s financial risk.
Nobody likes to be forced to shoulder a financial risk, so general contractors and property owners have, throughout the years, attempted to shift the burden back to the parties below them on the chain via contractual clauses. This battle of contract versus policy continues today.
After the creation of the mechanics lien, an ongoing string of contractual clauses attempting to shift that risk back down the chain emerged. In the 1940s, contracts began to include “no lien clauses” in an attempt to pass the financial risk to subcontractors and suppliers. However, when cases involving these no-lien clauses made it to court, they were routinely thrown out as impermissibly denying a statutory right and as against public policy.
General contractors and property owners adapted by including pay-when-paid clauses in their contracts. Again, courts came down on the side of subcontractors and suppliers by treating pay-when-paid provisions as a timing clause. This means they allowed the general contractors to wait for a “reasonable period of time” to receive payment before they were obligated to pay the subcontractors, but they were not absolved of that responsibility altogether.
Don’t You Wish Your Projects Ran This Smoothly? Viewpointcs.com
When the effect of pay-when-paid clauses lessened, these clauses morphed into pay-if-paid clauses, and were again inserted into contracts in an attempt to shift the risk down the payment chain. These have been the subject of much litigation, with varying results. Many courts have held these provisions to be akin to no-lien clauses and have declared them void as against public policy.
Many states, either via court decision or through statutory law, have decided that shifting financial risk through pay-if-paid clauses is disallowed, and have declared pay-if-paid clauses void as against public policy. However, this is not universal, or even necessarily the norm. Pay-if-paid clauses are still allowed and enforceable in many states, provided certain language is included in the clause itself.
While the requirements vary from state to state, in general the clause must specifically state that it is meant to shift the risk of nonpayment to the subcontractor or supplier, and that payment to the general contractor is a condition precedent to payment to the subcontractor or supplier.
Even in states where these types of clauses are allowed, they are generally not favored. Courts in most states view pay-if-paid clauses with disfavor, and do not need much incentive to find them unenforceable.
On one hand, there are statutory laws protecting subcontractors and suppliers, and attempting to keep the financial risk of construction projects on the property owners and general contractors: mechanics liens, bond requirements, criminal statutes, payment timing provisions, etc. On the other hand, there are contract provisions with which general contractors and property owners attempt to shift the project’s financial risk back down the ladder. Generally, judges tip the scales in favor of subcontractors and suppliers when these issues come up in litigation, but by no means is that always the case.
This battle between policy and contract is ongoing, and likely will continue in perpetuity, or at least as long as there are payment problems on construction projects.
About Nate Budde
Nate is the Chief Content Officer and Editing Director of the The Lien and Credit Journal, as well as a featured author, and works as the Chief Legal Officer and General Counsel at zlien, the nationwide mechanics lien service that publishes the blog. He is a licensed attorney in Louisiana, and a graduate of Stanford University (B.A.) and Tulane Law School (J.D.).
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