Can we get the subcontractor to give up its mechanic's lien rights in the subcontract?
No. Lien Law § 34 provides that notwithstanding any other law, any contract, agreement or understanding whereby the right to file or enforce a lien created under article 2 is waived is void as against public policy and wholly unenforceable. The section does not preclude a requirement for a written waiver of the right to FILE a mechanic's lien executed and delivered simultaneously with or after payment for the labour or materials covered (the saving words reach only the right to file, while the voiding sentence reaches the right 'to file or enforce'), nor is the section applicable to a written agreement to subordinate, release or satisfy all or part of such a lien made after a notice of lien has been filed. The prohibition reaches functional waivers as well as express ones: a pay-when-paid provision that forces the subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to the public policy set forth in Lien Law § 34, while a provision that merely fixes a TIME for payment is valid (West-Fair, answering in the affirmative the first of two questions certified to the Court of Appeals by the Second Circuit and leaving the second, on the surety's liability under the payment bond, 'not answered as academic'; there the owner had become insolvent, so further payment was 'virtually certain' not to come and the subcontractor's right to payment was 'indefinitely postponed'). Article 35-E lists five void provisions, two of which a payment clause hits directly: a provision stating that a party "cannot suspend performance under the contract if another party to the contract fails to make prompt payments" is void (GBL § 757(2)), as is one requiring retainage "in an amount exceeding five percent of the contract sum" (§ 757(5)), and the article reaches only construction contracts where the aggregate cost of the project is at least $150,000, excluding public-works projects and their subcontracts, individual one-, two- and three-family dwellings, a residential tract development of a hundred or fewer one- or two-family dwellings, residential projects of 4,500 square feet or less, and certain subsidised residential projects of fewer than seventy-five units (§ 756(1)).
The trap
Two New York traps sit on top of each other. First, the timing rule: a lien waiver signed up front is void, but a written waiver of the right to file, executed and delivered simultaneously with or after the payment it covers, falls outside the section, so the enforceability of a subcontractor's waiver turns on the date next to the signature, and on whether what was given up was the right to file or the right to enforce. Second, the condition-precedent trap: New York construes a payment-on-a-stipulated-event clause as a time-for-payment clause UNLESS there is express language to the contrary, so the drafter who writes what the West-Fair subcontract wrote (that 'THE PAYMENT TO THE TRADE CONTRACTOR [plaintiff] IS DEPENDENT, AS A CONDITION PRECEDENT, UPON THE construction manager [the general contractor] RECEIVING CONTRACT PAYMENTS, INCLUDING RETAINER FROM THE OWNER') converts a valid timing clause into a void risk-shifting one; the Court held that 'the unambiguous language of section 3.2 places the risk of the owner's inability or failure to pay the general contractor squarely upon plaintiff', so that the subcontractor 'has effectively waived its right to enforce its mechanics' liens'. Note the escape used in Welsbach, and how little it gives you. It was not the same clause: Welsbach's was a pay-IF-paid condition precedent ('all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the Work by Contractor from Owner'), and Welsbach warns in a footnote that the 'when' and 'if' formulations 'are different', Schuler-Haas's when-clause having been read as 'not... a condition precedent but a timing mechanism'. Nor was the clause enforced: both sides agreed it violated New York public policy, and but for the choice-of-law point the Court 'would simply apply Lien Law § 34 as interpreted in West-Fair and the case would be closed'. What saved it was the parties' Florida choice of law with neither party a New York corporation, and all the Court did was reverse the striking of the general contractor's affirmative defences and answer a certified question in the negative. For a covered contract made today the route is shut: Welsbach records in a footnote that 'it was not until 2002 that New York enacted section 757 of the General Business Law rendering void any provision that makes a construction contract subject to the laws of another state', and § 757(1) voids out-of-state choice-of-law and forum clauses in a construction contract 'with the exception of a contract with a material supplier'.
19 authorities
- statuteN.Y. LIE Law § 34enactment date not established
The words that state the rule
Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable.
- statuteN.Y. LIE Law § 34enactment date not established
The words that state the rule
This section shall not preclude a requirement for a written waiver of the right to file a mechanic's lien executed and delivered by a contractor, subcontractor, material supplier or laborer simultaneously with or after payment for the labor performed or the materials furnished has been made to such contractor, subcontractor, material man or laborer nor shall this section be applicable to a written agreement to subordinate, release or satisfy all or part of such a lien made after a notice of lien has been filed.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.N.Y.decided 1995read it at the source ↗
The words that state the rule
We hold that a pay-when-paid provision which forces the subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to public policy set forth in the Lien Law § 34. By contrast, a pay-when-paid provision which merely fixes a time for payment does not indefinitely suspend a subcontractor’s right to payment upon the failure of an owner to pay the general contractor, and does not violate public policy as stated in the Lien Law.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.N.Y.decided 1995read it at the source ↗
The words that state the rule
Following certification of questions by the United States Court of Appeals for the Second Circuit and acceptance of the *160 questions by this Court pursuant to section 500.17 of the Rules of the Court of Appeals (22 NYCRR 500.17), and after hearing argument by counsel for the parties and consideration of the briefs and the record submitted, certified question No. 1 answered in the affirmative, and certified question No. 2 not answered as academic.
- statuteN.Y. GBS Law § 757enactment date not established
The words that state the rule
§ 757. Void provisions. The following provisions of construction contracts shall be void and unenforceable: 1. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract, with the exception of a contract with a material supplier, that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted in another state.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.decided 1995read it at the source ↗
The words that state the rule
We reject plaintiff’s argument that the pay-when-paid provision in section 3.2 of the subcontract merely fixed a time for payment. A contract provision stating that payment will occur upon a stipulated event will be construed as a time for payment provision unless there is express language to the contrary in the contract
- statuteN.Y. GBS Law § 757enactment date not established
The words that state the rule
2. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that a party to the contract cannot suspend performance under the contract if another party to the contract fails to make prompt payments under the contract.
- statuteN.Y. GBS Law § 757enactment date not established
The words that state the rule
5. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract requiring retainage as expressly provided for by section seven hundred fifty-six-c of this article in an amount exceeding five percent of the contract sum.
- statuteN.Y. GBS Law § 756enactment date not established
The words that state the rule
1. "Construction contract" means a written or oral agreement for the construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement, or relating to the excavation of or other development or improvement to land, and where the aggregate cost of the construction project including all labor, services, materials and equipment to be furnished, equals or exceeds one hundred fifty thousand dollars. For the purposes of this article a construction contract shall not include any such contract made and awarded by the state, any public department, any public benefit corporation, any public corporation or official thereof, or a municipal corporation or official thereof for construction, reconstruction, alteration, repair, maintenance, moving or demolition of any public works project nor any contract with a contractor or subcontractor which is part of such project; or any such contract the purpose of which is the construction, reconstruction, alteration, repair, maintenance, moving or demolition of an individual one, two or three family residential dwelling or a residential tract development of one hundred or less one or two family dwellings, or any residential construction project where the aggregate size of such project is four thousand five hundred square feet or less, or any residential project of fewer than seventy-five units which receives financial assistance from the federal government, the state or a municipal entity designed for households earning an average of one hundred twenty-five percent of the housing and urban development agency area median income.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.N.Y.decided 1995read it at the source ↗
The words that state the rule
Section 3.2 of the subcontract agreement provides in relevant part: "it is specifically understood and agreed that THE PAYMENT TO THE TRADE CONTRACTOR [plaintiff] IS DEPENDENT, AS A CONDITION PRECEDENT, UPON THE construction manager [the general contractor] RECEIVING CONTRACT PAYMENTS, INCLUDING RETAINER FROM THE OWNER”.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.N.Y.decided 1995read it at the source ↗
The words that state the rule
In contrast, the face of the subcontract here explicitly makes payment from the owner to the general contractor a "condition precedent” to any payment to plaintiff. Since the unambiguous language of section 3.2 places the risk of the owner’s inability or failure to pay the general contractor squarely upon plaintiff, the pay-when-paid provision here cannot be construed as a time for payment clause.
- case87 N.Y.2d 148West-Fair Electric Contractors v. Aetna Casualty & Surety Co.N.Y.decided 1995read it at the source ↗
The words that state the rule
However, a pay-when-paid provision as a condition precedent requires plaintiff to defer payment for its work until the general contractor has been paid by the owner. As the owner here has become insolvent, the owner may never make another contract payment to the general contractor. Because the lack of future payments by the owner is virtually certain, plaintiff’s right to receive payment has been indefinitely postponed, and plaintiff has effectively waived its right to enforce its mechanics’ liens.
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
In the case before us, plaintiff subcontractor is a Delaware corporation and defendant general contractor is a Florida corporation. The parties agreed that Florida law would govern their contract. Unlike New York, Florida allows pay-if-paid contracts. We must determine whether New York’s public policy against such contracts is so fundamental that it should override the parties’ choice of law. We hold that it is not, and that the parties’ choice of law controls.
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
The subcontract included a pay-if-paid clause stating that: “Upon final acceptance of the Work by Contractor and Owner, Contractor will pay Subcontractor for the Work at the prices and schedule and in the manner described in Schedule 1; provided that, all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for *628 the Work by Contractor from Owner
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
Both sides agree that the subcontract’s pay-if-paid clause violates New York’s public policy. 2 Were we not dealing with choice of law, we would simply apply Lien Law § 34 as inter *629 preted in West-Fair and the case would be closed.
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.decided 2006read it at the source ↗
The words that state the rule
Section 34 seeks to protect New York subcontractors from the oppressive use of bargaining power. Here, neither party is a New York corporation; notably, MasTec is a Florida corporation. As dissenting Justice Krausman pointed out, both are sophisticated commercial entities that knowingly and voluntarily entered into the subcontract.
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
Accordingly, the order of the Appellate Division should be reversed, with costs, plaintiffs motion, insofar as it seeks to dismiss the fifth and eleventh affirmative defenses interposed in the answer, denied and the certified question answered in the negative.
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
We found this not to be a condition precedent but a timing mechanism ( 40 NY2d 883, *629 885 [1976]). We need not discuss the different ramifications of the “when” versus “if” formulations, which have been the subject of extensive commentary
- case7 N.Y.3d 624Welsbach Electric Corp. v. MasTec North America, Inc.N.Y.decided 2006read it at the source ↗
The words that state the rule
Moreover, it was not until 2002 that New York enacted section 757 of the General Business Law rendering void any provision that makes a construction contract subject to the laws of another state.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.