Originally published in STA Subcontractors News, January 2011.
In the recent case of JC Ryan EBCO/H & G, LLC v. Lipsky Enterprises, Inc., 2010 NY Slip Op 8073, 2010 N.Y. App. Div. LEXIS 8280 (November 9, 2010) the Appellate Division, Second Department upheld a trial court's denial of a motion to dismiss, which motion was based upon a six month contractual limitation of time. The basis of the decision was that there was a conflict between the contractual limitations period and a pay-when-paid clause in the contract.
Parties to a contract are generally free to shorten statutory limitation periods in which to commence a lawsuit, provided that the shortened limitation is not found in a contract of adhesion, is not the product of overreaching, or is not an unreasonably short period. Although the statute of limitations for a breach of contract action is six years (CPLR 213[2]), contractual reductions of time to one year or even six months have generally been upheld by the courts as reasonable. In fact, the Second Department twice upheld identical 90 day limitations of time set forth in subcontracts written by the same contractor. (Krohn v. Felix Indus., 226 A.D.2d 506 [2d Dept. 1996]; Wayne Drilling & Blasting v. Felix Indus., 129 A.D.2d 633 [2d Dept. 1987].)
However, in Certifi ed Fence Corporation v. Felix Indus., 260 A.D.2d 338 (2d Dept. 1999) the Second Department, again faced with the identical 90 day limitation in a subcontract by the same contractor, upheld a plaintiff's judgment, holding that the limitations provision was inconsistent with the pay-when-paid clause in the subcontract and was unenforceable because it "unreasonably deprives the plaintiff of a course of action." Under the pay-when-paid provision, plaintiff could not maintain an action until the owner paid the general contractor, by which time the 90 day limitation would have expired.
In the JC Ryan case, the general contractor Lipsky Enterprises, Inc. was awarded a contract to perform work at Suffolk Community College. Lipsky and its surety executed and delivered a labor and material payment bond which provided that a lawsuit based upon the bond had to be commenced within one year of the date on which the last labor or service was performed by anyone or the last materials or equipment were furnished by anyone under the construction contract. Lipsky entered into a subcontract with JC Ryan. The subcontract included a "pay-when-paid" clause which provided that "payment by the Owner of any progress or final payment is a condition precedent to Contractor's obligation to make payment to the Subcontractor." It also provided that the subcontractor was to pursue a lien foreclosure action to final judgment as a condition precedent to any action against the general contractor. The subcontract also contained a provision that any action by the subcontractor for breach of the subcontract or to enforce any trust imposed by law on the general contractor had to be commenced within six months "after the Work of the Subcontractor has been substantially completed."
The Second Department held that the pay-when-paid clause which forced the subcontractor to assume the risk that the owner would fail to pay the general contractor was void and unenforceable as contrary to public policy, citing the New York Court of Appeals decision in West-Fair Elec. Contrs. v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148 (1995). Additionally the court held that the six month limitations clause in the subcontract conflicted with the pay-whenpay clause because the subcontractor's right to bring an action might not ripen until after the six month period had expired, citing its own decision in the Certified Fence case.
One might ask the question "If the pay-when-paid clause is unenforceable, why wasn't it stricken, erasing the conflict and permitting the six month limitation to govern?" The Second Department answered this question in the JC Ryan case by holding that the pay-when-paid clause and the contractual limitations clause were not severable, citing Christian v. Christian, 42 N.Y.2d 63 (1977). The Second Department concluded that the trial court correctly held that the six month limitations clause did not bar the action.
As a final comment, the Second Department noted that the motion before the trial court did not seek relief under State Finance Law §137(4)(b) therefore the issue of whether there were grounds for dismissal under that statute were not properly before the Appellate Division. That section provides that, with respect to an action on a payment bond on a public project, an action must be commenced within one year "from the date on which final payment under the claimant's subcontract became due."
For those who are drafting and negotiating construction subcontracts, take note that a contractual limitation of time may be unenforceable if the contract also contains a pay-when-paid clause which attempts to shifts the burden of non-payment by the owner to the subcontractor. Also note that if the pay-when-paid clause makes payment by the owner to the general contractor a condition precedent to payment by the general contractor to the subcontractor, that clause will also be unenforceable.
For those subcontractors who are facing a motion to dismiss based upon a shortened contractual limitation of time, check your subcontract carefully; you may have an escape clause in the form of a conflicting pay-when-paid clause.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
