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A recent Appellate Court case in Connecticut said, “Be sure to read every contract before you sign it.”
Well, almost.
In a decision that has broad implications for the construction industry—and for all businesses that work for other businesses in serving a customer—the Court enforced a subcontract exactly as written, even though some may consider the outcome harsh and unfair.
Here, the owner hired a contractor, who hired a subcontractor. The subcontract said that payment by customer to the contractor was a “condition precedent” to the contractor’s obligation to pay the subcontractor. The subcontractor performed all its work perfectly. As luck would have it, the customer became insolvent and was unable to pay the contractor. The subcontractor sued the contractor for all the work it did. The contractor argued that, since the customer’s payment was a precondition to its obligation to pay, it owed the subcontractor nothing. The Appellate Court agreed; the contractor did not have to pay.
By making the owner’s payment a “condition precedent” to the contractor’s obligation to pay, the contractor effectively transferred the risk of the owner’s insolvency to the subcontractor—even though the contractor was in a position to ensure payment by the customer—and the subcontractor was not. Citing the “strong public policy in Connecticut favoring freedom of contract” the Appellate Court enforced the “condition precedent” language exactly as written. The subcontractor did the work. The customer became insolvent. And the contractor did not have to pay the subcontractor.
The Appellate Court distinguished some cases in which a "pay when paid" clause was interpreted merely to defer payment for a "reasonable time," whether or not the contractor got paid. Here, however, the Appellate Court held that, if payment by the owner was a "condition precedent" to payment by the contractor, then the contractor did not have to pay at all.
The takeaways? A contractor would want a contract that says payment by the owner is a "condition precedent" to paying the subcontractor. The subcontractor, of course, would want to delete such a clause. And, because major ramifications often turn on only a few words in a contract, it is critically important to read every provision carefully. This is but one glaring example.
When someone says, “Sign this, it’s just a standard form contract,” proceed with caution. Negotiate unfavorable provisions before you sign.
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