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A contractor that signed a “pay when paid” contract with a subcontractor cannot rely on the insolvency of its client to defend its nonpayment of the subcontractor, an Appellate Division, 2nd Department panel has held. The subcontract that contained the pay-when-paid provision was subject under a choice-of-law provision to Florida law. Such provisions are void under New York law, but have been upheld by state courts when applying the law of other jurisdictions.

In the present case, however, the 2nd Department declined to enforce the provision, holding that the clause violates public policy. “Although the pay-when-paid provision at issue is enforceable under Florida law … the New York Court of Appeals held … that a pay-when-paid provision which forces a subcontractor to assume the risk that the owner will fail to pay the general contractor is void and unenforceable as contrary to public policy,” the panel held in its unsigned 3-1 decision, Welsbach Electric Corp. v. MasTec North America, 231/02. Justices Barry A. Cozier, William F. Mastro and Steven W. Fisher joined the majority. Justice Gabriel M. Krausman dissented. The decision establishes a split with the 1st Department, which found a Florida pay-when-paid provision enforceable in Hugh O’Kane Elec. Co. v MasTec N. Am., 19 AD3d 126, a case involving the same contractor-defendant as the present case. In the case decided last week, Florida-based MasTec North America signed the underlying agreement with nonparty Telergy Metro in September 1999. MasTec subcontracted with the plaintiff, Queens-based Welsbach Electric, in November 2000. In August 2001, Telergy became insolvent. Its contract with MasTec was terminated, thereby terminating MasTec’s subcontract with Welsbach. Neither MasTec nor Welsbach was paid for its work. Welsbach subsequently commenced the present action, seeking the money allegedly due. MasTec asserted the pay-when-paid and termination provisions as an affirmative defense. Welsbach moved to dismiss those defenses. Last Thursday, the 2nd Department upheld Queens Supreme Court Justice William T. Glover’s decision to grant Welsbach’s motion. “The Lien Law is remedial in nature and intended to protect those who have expended labor or materials to improve real property at the direction of the owner or general contractor,” the panel held, citing West-Fair Elec Contrs. v. Aetna Cas. & Sur. Co., 87 NY2d 148. In his dissent, Krausman acknowledged that pay-when-paid provisions are void under the state’s Lien Law. “However, the fact that Lien Law �34 expresses the State’s public policy of providing a measure of protection to subcontractors whose efforts are responsible for improving real property does not automatically lead to the conclusion that this is a deeply rooted, fundamental policy,” Krausman wrote. “[B]efore 1975, it was not the declared public policy of this State to bar enforcement of such waivers,” he added. Edward T. Byrne and Paul J. Murdy of Rockville Centre-based Murtagh, Cohen & Byrne represented plaintiff Welsbach Electric. Byrne said that it was not a coincidence that both this case and the 1st Department decision, Hugh O’Kane, involved the same defendant, MasTec North America. In both cases, Byrne said, MasTec advanced the construction funds to the original client. MasTec was “on both sides of the transaction. They were paying to do all the work with these borrowed funds,” he said. Then, “they turned off the spigot.” Thomas Moll of Buffalo’s Goldberg Segalla represented MasTec North America. He did not return a call seeking comment.

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