A "pay if paid" provision in a construction subcontract typically provides that the contractor's receipt of payment from the owner is a condition precedent to the general contractor's obligation to make payment. This provision shifts the risk of the owner's failure to make payment from the general contractor to the subcontractor.
The advisability of enforcing pay if paid provisions, and thereby allowing the risk of non-payment to be shifted to the subcontractor, is debatable. Historically, the construction industry has operated on credit terms. Most states have enacted construction lien laws which provide a mechanism for an unpaid contractor or subcontractor to file a non-consensual lien against the improved real property.
Although pay if paid clauses have been used for a considerable period of time in the construction industry, courts in the majority of states, including Michigan, have traditionally interpreted the clause to require payment in any event within a reasonable period of time, i.e. the clause is viewed as postponing payment under the subcontract for a reasonable period of time.
However, the Christman holding, recognizing that pay if paid clauses require payment by the owner as a condition precedent to a subcontractor being paid, will effectively limit the rights available to an unpaid subcontractor under the Michigan Lien Act ("CLA").
While the right to record a lien pursuant to the CLA is not limited to cases where payment is due and owing, the right to enforce the lien through foreclosure is limited to cases where payment is owing. Arguably, pursuant to the Christman interpretation of the pay if paid provision, if no such payment is due the court would be unable to find that any amount is due to the lien claimant/subcontractor so as to permit enforcement through the sale of the property.
Such an effect is arguably contrary to the CLA, which provides that the right to a construction lien may not be waived in advance of the performance of the work for which the lien is claimed. For just this reason, in 1995 the New York Court of Appeals, in West Fair Contractors v. Aetna Casualty & Surety Co., held that a pay if paid provision in a construction contract is unenforceable as against public policy set forth in the New York Lien Law. The West Fair decision is in line with the majority of jurisdictions in the United States.
A similar analysis is applicable to Michigan public policy, as set forth in the CLA. A contractual provision which prevents payment from coming due in the event of nonpayment by the owner may have the effect of preventing enforcement of a construction lien and, thereby, is subject to challenge as unenforceable and against public policy.
In the future, challenges to the holding in Christman shall certainly arise. It is likely that the Michigan courts will overrule or modify the Christman decision in order to comply with the public policy behind the Michigan Construction Lien Act. Such a ruling or modification would bring Michigan within the majority in the United States, along with such states as Texas, California, New York and Illinois.