You asked how many states have laws concerning “pay-when-paid” or “pay-if-paid” clauses in private commercial construction contracts.

SUMMARY

Construction contracts often specify that a subcontractor will be paid when the project owner pays the general contractor, or within a specified number of days thereafter. Most courts have construed such clauses as governing the timing of the payment to the subcontractor. Under this interpretation, the general contractor can delay his payments to his subcontractors if the owner does not pay him, but he must pay the subcontractors within a reasonable time in any case. However, some contracts explicitly make payment to the subcontractor contingent on the owner’s payment to the general contractor, under what is commonly called a “pay-if-paid” clause.

At least three states (Illinois, North Carolina, and Wisconsin) have statutes making “pay-if-paid” clauses unenforceable. In Arizona, the issue is the subject of litigation. In addition, the California and New York supreme courts have held that such clauses are not enforceable as violating public policy. On the other hand, courts in other states have held that “pay-if-paid” clauses are enforceable, at least under certain circumstances.

In addition while Indiana, Maryland, Missouri, and Utah do not bar such clauses, their presence in a contract does not limit a subcontractor’s right to enforce a mechanic’s lien against the project owner. Ohio has a similar law.

STATUTES

Under Illinois’ law (770 Ill. Com. Stat. 60/21), a contract provision that conditions payment by a general contractor to a subcontractor or supplier on the general contractor’s being paid by the owner or other third party does not act as a defense against claims made by the subcontractor or supplier. This effectively makes “pay-if-paid” clauses unenforceable.

Similarly, under North Carolina law (N. C. Gen. Stat. Sec. 22C-2), if a subcontractor performs its contract in accordance with the contract’s provisions, the subcontractor is entitled to payment. Payment by the owner to a contractor is not a condition for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition for payment to any other subcontractor, and an agreement to the contrary is unenforceable.

Wisconsin makes any provision in a contract to improve land void if it makes a payment to a general contractor from any person who does not have a contractual agreement with the subcontractor or supplier (e. g. , the project owner) a condition for the general contractor's payment to a subcontractor or a supplier.   But this law does not prohibit contract provisions that may delay a payment to a subcontractor until the contractor receives payment from any person who does not have a contractual agreement with the subcontractor or supplier, i. e. , a “pay-when-paid” clause Wisc. Stat. Sec. 779. 135(3).

Most states have laws allowing firms and individuals who work on construction projects to place a mechanic’s lien on the improved property to guarantee their payment. Some states also require the general contractor to post a bond to ensure that his subcontractors and suppliers will be paid. While Missouri does not bar “pay-if-paid” clauses, such a clause is not a defense to a claim to enforce a mechanic's lien. Mo. Ann. Stat. Sec. 431. 183. Indiana and Utah have parallel laws Indiana Stat. § 32-28-3-18, Utah Code § 13-8-4. Similarly, in Maryland such a clause may not abrogate or waive the subcontractor’s right to claim a mechanic's lien or sue on a contractor’s bond Md. Code. Ann. Real Prop. Law Sec. 9-113. Ohio prohibits construction contracts that contain “pay-if-paid” clauses from preventing contracting entities from filing a claim to protect their rights under the state's lien and bond statutes so that their rights do not expire while they are waiting to be paid. Ohio Rev. Code § 4113. 62(d).

COURT CASES

“Pay-when-paid” Clauses

Although not binding in Connecticut, the leading case on the enforceability of “pay-when-paid” clauses is Thos. J. Dyer Co. v. Bishop International Engineering Co. , 303 F. 2d 655 (6th Cir. 1962). As reported in Dyer, the contract provided that no part of the price to be paid to the subcontractor would be due until five days after the owner paid the general contractor. Following the owner’s insolvency, a subcontractor sought to enforce its contract with the general contractor. The Sixth Circuit rejected the general contractor's argument that the contract language gave it a defense to the breach of contract claim. The court interpreted the contract as allowing the general contractor to postpone payment for a reasonable period of time after the work was completed, during which the general contractor would have the opportunity of procuring from the owner the funds needed to pay the subcontractor. The court held that requiring the subcontractor to wait for an indefinite period of time until the owner paid the general contractor, which might never occur, would be an unreasonable interpretation that the parties did not intend when they entered into the contract. The court held that a contractor could shift to the subcontractor the risk of the owner’s nonpayment or insolvency. But to do so, the contract should have specific language showing that this is what the parties intended.

Since the Dyer decision, most jurisdictions that have interpreted “pay when paid” clauses have adopted the Sixth Circuit’s reasoning. See, inter alia, Gilbane Building Co. v. Brisk Waterproofing Co. , Inc. , 585 A. 2d 248, 250 (Md. Ct. Spec. App. 1991), Koch v. Construction Technology, 924 S. W. 2d 68, 71 (Tenn. 1996), G. E. L. Recycling v. Atlantic Envi. , 821 So. 2d 431 (Fla. 5 DCA 2002).

“Pay-if-paid” Clauses

In West-Fair Elec. Contractors v. Aetna Casualty & Surety Co. , 87 N. Y. 2d 148,157; 661 N. E. 2d 967, 971 (1995), New York’s highest court struck down “pay-if-paid” clauses as violating public policy as expressed in the state’s mechanic’s lien law. It reasoned that if such clauses could be enforced, they would eliminate the subcontractor’s ability to enforce his lien. Similarly, the California Supreme Court has ruled that “a general contractor’s liability to a subcontractor for work performed may not be made contingent on the owner’s payment to the general contractor. ” Wm. R. Clarke Corp. v. Safeco Ins. Co. of America, 15 Cal. 4^th 882; 64 Cal. Rptr. 2d 578 (1997). The court found that “pay-if-paid” provisions to be contrary to public policy because they effect an impermissible indirect waiver of the subcontractor’s mechanic’s lien rights, which are established in the state constitution. On the other hand, the court expressly did not address “pay-when-paid” clauses. The state appellate court had previously construed such clauses as requiring payment to the subcontractor within a “reasonable time” whether or not the owner pays the general contractor. Yamanshi v. Bleily & Collishaw, Inc. , 29 Cal. App. 3d 457, 462-63 (1972).

On the other hand, the Virginia Supreme Court has held that “pay-if-paid” clauses may be enforced as written, but the intent to shift the risk of an owner’s insolvency from the general contractor to the subcontractor must be clearly expressed. Galloway Corp. v. S. B. Ballard Construction Company, 464 S. E. 2d 349 (Va. 1995). Michigan Court of Appeals has also held that “pay-if-paid” clauses are enforceable. Christman Company v. Brown Development Company, 533 N. W. 2d 831, cert. denied 549 N. W. 2d 562 (1996).

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