Welsbach Elec. v. Mastec North America

• Decision Date: 20 November 2006
• Citation: 7 N.Y.3d 624,859 N.E.2d 498
• Parties: WELSBACH ELECTRIC CORP., Respondent, v. MASTEC NORTH AMERICA, INC., Appellant.
• Court: New York Court of Appeals Court of Appeals

Page 498

859 N.E.2d 498

7 N.Y.3d 624

WELSBACH ELECTRIC CORP., Respondent, v. MASTEC NORTH AMERICA, INC., Appellant.

Court of Appeals of New York.

November 20, 2006.

Goldberg Segalla LLP, Albany (Thomas M. Moll of counsel), for appellant.

Murtagh, Cohen & Byrne, Rockville Centre (Edward T. Byrne and Paul J. Murdy of counsel), for respondent.

Goetz Fitzpatrick, LLP, New York City (David E. Wolff, Denis B. Frind and David Kuehn of counsel), for American Subcontractors Association, Inc., amicus curiae.

OPINION OF THE COURT

ROSENBLATT, J.

For well over a century, parties to construction contracts in New York were permitted by decisional law and by statute to agree to "pay-if-paid" provisions. Agreements of that type create a condition precedent by which the subcontractor will not be paid unless the contractor has been paid. In 1995, however, we held in West-Fair Elec. Contrs. v. Aetna Cas. & Sur. Co., 87 N.Y.2d 148, 638 N.Y.S.2d 394, 661 N.E.2d 967 (1995) that such contracts violate New York's public policy as expressed in Lien Law § 34. That section provides in pertinent part: "Notwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable."

In the case before us, plaintiff subcontractor is a Delaware corporation and defendant general contractor is a Florida corporation. The parties agreed that Florida law would govern their contract. Unlike New York, Florida allows pay-if-paid contracts. We must determine whether New York's public policy against such contracts is so fundamental that it should override the parties' choice of law. We hold that it is not, and that the parties' choice of law controls. As we said in Cooney v. Osgood Mach., 81 N.Y.2d 66, 79, 595 N.Y.S.2d 919, 612 N.E.2d 277 (1993), "plainly not every difference between foreign and New York law threatens our public policy. Indeed, if New York statutes or court opinions were routinely read to express fundamental policy, choice of law principles would be meaningless."¹

I

On September 10, 1999, Telergy Metro LLC engaged defendant MasTec North America, Inc. to construct a fiber optic telecommunications network from Pleasant Valley to New York City. On November 28, 2000, MasTec subcontracted with plaintiff Welsbach Electric Corp. to do the electrical work for the project. The subcontract included a pay-if-paid clause stating that:

"Upon final acceptance of the Work by Contractor and Owner, Contractor will pay Subcontractor for the Work at the prices and schedule and in the manner described in Schedule 1; provided that, all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the Work by Contractor from Owner ...." (Emphasis added.)

The parties also agreed that termination, suspension or delay of the primary contract between Telergy and MasTec automatically terminated, suspended or delayed the subcontract on both the same basis and effective date. In the event of termination, suspension or delay, Welsbach would be allowed to recover from the owner amounts payable to MasTec less any anticipated gross profit from the work.

In August 2001, Telergy became insolvent and terminated its contract with MasTec, effectively terminating the subcontract. MasTec, and in turn, Welsbach, were not fully paid for their work. Welsbach sued MasTec for the unpaid balance under the subcontract.

In its fifth and eleventh affirmative defenses MasTec asserted that: (1) Florida law, which enforces pay-if-paid provisions, governs the subcontract; MasTec never received payment from Telergy and therefore owes no money to Welsbach and (2) Welsbach can seek recovery only from Telergy pursuant to the termination provision in the subcontract.

Welsbach moved for partial summary judgment and dismissal of those affirmative defenses, arguing that the subcontract's pay-if-paid provision violates Lien Law § 34. MasTec crossmoved for leave to serve an amended answer with two counter-claims. Supreme Court struck the two affirmative defenses, otherwise denied Welsbach's motion, and granted MasTec's cross motion. The court held that although pay-if-paid clauses are enforceable in Florida, they violate Lien Law § 34 because the subcontractor is forced to assume the risk that the owner will fail to pay the general contractor. On an appeal to the Appellate Division from so much of Supreme Court's order as struck the affirmative defenses, that Court, with one Justice dissenting, affirmed. We now reverse.

II

Both sides agree that the subcontract's pay-if-paid clause violates New York's public policy.² Were we not dealing with choice of law, we would simply apply Lien Law § 34 as interpreted in West-Fair and the case would be closed. The issue before us, however, is whether our public policy is so unyielding that it trumps the parties' agreement to apply the law of another state. Put differently, there are two conflicting policies at work here: one, that parties should be free to chart their own contractual course, the other, that there are certain contracts the State will not allow.

Generally, courts will enforce a choice-of-law clause so long as the chosen law bears a reasonable relationship to the parties or the transaction (Cooney, 81 N.Y.2d at 70-71, 595 N.Y.S.2d 919, 612 N.E.2d 277). A basic precept of contract interpretation is that agreements should be construed to effectuate the parties' intent (see Greenfield v. Philles Records, 98 N.Y.2d 562, 569, 750 N.Y.S.2d 565, 780 N.E.2d 166 [2002]; see R/S Assoc. v. New York Job Dev. Auth., 98 N.Y.2d 29, 32, 744 N.Y.S.2d 358, 771 N.E.2d 240 [2002]; W.W.W. Assoc. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639 [1990]). Where an agreement is clear and unambiguous, a court is not free to alter it and impose its personal notions of fairness (see Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 [2004]; Greenfield, 98 N.Y.2d at 570, 750 N.Y.S.2d 565, 780 N.E.2d 166; Reiss v. Financial Performance Corp., 97 N.Y.2d 195, 199, 738 N.Y.S.2d 658, 764 N.E.2d 958 [2001]).

The freedom to contract, however, has limits. Courts will not, for example, enforce agreements that are illegal³ or where the chosen law violates "some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal" (Cooney, 81 N.Y.2d at 78, 595 N.Y.S.2d 919, 612 N.E.2d 277, quoting Loucks v. Standard Oil Co. of N.Y., 224 N.Y. 99, 111, 120 N.E. 198 [1918]; see generally Restatement [Second] of Conflict of Laws § 187[2]). "If ... the foreign law does not entail any such violation ... full effect should be given to the law of our sister State" (Ehrlich-Bober & Co. v. University of Houston, 49 N.Y.2d 574, 584, 427 N.Y.S.2d 604, 404 N.E.2d 726 [1980]). Crucially, however, we have reserved the public policy exception "for those foreign laws that are truly obnoxious" (Cooney, 81 N.Y.2d at 79, 595 N.Y.S.2d 919, 612 N.E.2d 277).

This appeal requires us to examine the policy considerations underlying Lien Law § 34 to determine whether it embodies a concept so fundamental to our law as to meet this test. We have characterized concepts as "fundamental" in other contexts. For example, in Scheiber v. St. John's Univ., 84 N.Y.2d 120, 125, 615 N.Y.S.2d 332, 638 N.E.2d 977 (1994), we recognized that the "Human Rights Law ... effects this State's fundamental public policy against discrimination by establishing equality of opportunity as a civil right." We said in Sanders v. Winship, 57 N.Y.2d 391, 395, 456 N.Y.S.2d 720, 442 N.E.2d 1231 (1982) that legislation outlawing discrimination in the sale of cooperative real estate interests is a "fundamental State policy." Also, in Matter of Board of Higher Educ. of City of N.Y. v. Carter, 14 N.Y.2d 138, 144, 250 N.Y.S.2d 33, 199 N.E.2d 141 (1964), we noted that interdiction of discrimination in civil rights based on race or creed is a "fundamental public policy of New York." For reasons that follow, we agree with MasTec and the dissenting Justice that Lien Law § 34, which deals with risk allocation under a construction contract, is not of this tenor.

III

Mechanics' liens did not exist at common law; they are creatures of statute (Birmingham Iron Foundry v. Glen Cove Starch Mfg. Co., 78 N.Y. 30, 32 [1879]; Derby, The New Mechanics' Lien Law of the State of New York, Preface [1885]). The first mechanics' lien law of New York was enacted in 1830 (L. 1830, ch. 330). Early New York treatises on mechanics' liens recognized that the right to file a lien could be waived.⁴ In fact, New York courts, as well as those of our sister states, consistently enforced clear and unambiguous lien waivers.⁵ Indeed, in 1922 we held that "[n]o good reason can be suggested ... why a contractor cannot, for a valuable consideration, waive the provisions of the statute giving him the right to file a notice of lien" (Cummings v. Broadway-94th St. Realty Co., Inc., 233 N.Y. 407, 411-412, 135 N.E. 832 [1922]; see also Embury v. Conner, 3 N.Y. 511, 519 [1850]; Buel v. Trustees of Vil. of Lockport, 3 N.Y. 197, 200 [1849]).

In 1929 the Legislature enacted Lien Law § 34. The statute codified decisional law allowing contractors, subcontractors, material suppliers and laborers to waive their right to file and enforce a lien by a signed, written agreement expressing such intent. For decades thereafter, courts upheld these waivers pursuant to Lien Law § 34.⁶

It was not until 1975 that the Legislature repealed the 1929 statute and replaced it with the current version of Lien Law § 34. Even then, the courts perceived no connection between section 34's waiver prohibition and pay-if-paid contracts. Courts continued to uphold pay-if-paid clauses where the parties clearly agreed that payment to the contractor was a condition precedent to...