Entech Engineering, P.C. v. Dewberry Engineers, Inc., 204 A.D.3d 467, 167 N.Y.S.3d 55 (1st Dep’t 2022)

The New York Supreme Court Appellate Division recently affirmed a ruling enforcing a pay-if-paid provision.

Defendant Dewberry Engineers, Inc. (Dewberry) contracted with the New York City Economic Development Corporations’ Build-It- Back Hurricane Sandy Program to inspect homes for structural, asbestos, and lead paint issues. Dewberry retained Entech Engineering PC (Entech) to perform pre-construction lead paint inspections of homes. The subcontract contained a pay-if-paid clause that made the city’s payment to Dewberry a condition precedent to Dewberry’s obligation to pay Entech.

Eventually, Dewberry terminated Entech. Entech sued to recover damages based on three unpaid invoices, including a cause of action for foreclosure on a public improvement lien. Despite a Virginia choice-of-law clause in the subcontract, Entech argued New York law applied, and the enforcement of the pay-if-paid provision violated New York public policy. The lower court dismissed Entech’s cause of action for foreclosure on a public improvement lien, concluding that the pay-if-paid provision was enforceable under both New York law and then-existing Virginia law.

The New York Supreme Court Appellate Division considered whether that conclusion was in error. The Appellate Division reiterated the general rule that if a subcontractor has a right to file a lien under New York’s lien law, a pay-if paid clause “forcing the subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable against public policy.”

Here, Entech had no lien law rights. The lower court had dismissed its cause of action for foreclosure on a public improvement lien. Entech argued that it nevertheless had lien rights because it performed lead paint inspections with the consent of the private homeowners, and the lack of any contractual relationship with those homeowners did not bar it from filing a private mechanics’ lien. But the Appellate Division concluded that home lead inspections do not constitute “labor for the improvement of real property” subject to a private mechanics’ lien. Without any impediments to enforce the pay-if paid clause, the Appellate Division affirmed the decision.

NOTE: Approximately 10 days after the court rendered this opinion, the Virginia General Assembly passed a bill banning pay-if-paid clauses in public and private construction contracts. The law requires that any construction contract between a general contractor and subcontractor include a provision obligating the higher-tier contractor to pay the lower-tier contractor within 45 days of satisfactory completion of the subcontract work or seven days after the higher tier contractor’s receipt of payment for the subcontract work from the owner — which ever date is the earlier. The opinion above thus has no bearing on Virginia’s current law.