Header graphic for print
Construction Law Today

Presumption Against Pay-if-Paid in Construction Contracts – Beal Bank Nevada v. Northshore Center THC

Posted in Claims

w-fallOwner fails to pay prime contractor. Prime denies payment to a subcontractor, citing subcontract language that the prime contends conditions payment to the subcontractor on prior owner payment to the prime. Result: the subcontract language isn’t clear enough to support the prime’s weight; the prime must pay the subcontractor regardless of whether the owner paid the prime.

The decision: Beal Bank Nevada v. Northshore Center THC (PDF)

Backstory

Prime contractor subcontracts with a subcontractor to provide excavation, sewer line, and other work. The owner doesn’t pay the prime for that work, and so the prime doesn’t pay downstream to the sub for that work either.

The subcontractor sues the prime contractor for breach of contract (as well as to foreclose a mechanics lien). The prime contractor defends, contending that the subcontract requires the prime to pay the sub only if the owner first pays the prime for the sub’s work (and then only after a certain amount of time after the owner’s payment to the prime). According to the prime contractor, the subcontract imposes owner payment to the prime as a condition precedent on the prime’s duty to pay the sub.

Here’s that language from the subcontract (edited to keep identities consistent with how we use them here):

5.1 Provided subcontractor’s rate of progress and general performance are satisfactory to the prime contractor, and provided that the subcontractor is in full compliance with each and every provision of the subcontract, the prime contractor will make partial payments to the subcontractor in an amount equal to 90 percent of the estimated value of work and materials incorporated in the construction and an amount equal to 90 percent of the materials delivered to and suitably and properly stored by the subcontractor at the project site, to the extent of subcontractor’s interest in the amounts allowed thereon and paid to contractor by the owner, less the aggregate of previous payments, within five (5) days of receipt thereof from the owner.

5.2 Final payment will be made within thirty (30) days after the work called for hereunder has been completed by the subcontractor to the satisfaction of the owner and the prime contractor and the prime contractor has received from the Owner written acceptance thereof together with payment in full for this portion of the work.

Hearing the case, the Honorable Anthony Kiriakopoulos grants the prime contractor’s motion for summary judgment. He agrees that owner payment to the prime contractor is a condition precedent on the prime’s duty to pay the subcontractor. The subcontractor appeals.

Decision on Appeal

The Appellate Court reverses and remands. The justices examine the subcontract and decide prior owner payment is not a condition precedent on the prime’s duty to pay the subcontractor. The justices explain: the judiciary disfavors conditions precedent. If conditions are clearly and unambiguously articulated, they will recognize and enforce them. But a condition precedent isn’t clear and unambiguous in this subcontract.

The justices compared the language in this subcontract with language from the subcontract in an earlier decision—A.A. Conte v. Campbell-Lowrie-Lautermilc—that held owner payment to the prime was a condition precedent to prime to sub payment. Contrasting the subcontract here, they justices emphasized the decisive role of the word “if” used the Conte subcontract and its absence here.

Via federal decisions, decisions from other state courts, and scholarly commentary, the justices toured the differences between “pay-if-paid” vs. “pay-when-paid” clause jurisprudence. Pay-when-paid language established a default setting for timing payments downstream. But only pay-if-paid language conditions downstream payment in prior upstream payment. The justices then held that—without a sufficient condition precedent language in this subcontract—this subcontract qualified as pay-when-paid, not pay-if-paid.

The justices also distinguished other cases where the condition precedent to payment was design professional (i.e., architect) instead of upstream payment from the owner (suggesting that language imposing design professional approval as a condition precedent to payment is less suspect, and might be worthy of less intense scrutiny).

Lessons and Observations

  • Presumption against conditions precedent. Borrowing from bodies of law on evidence and burdens of proof simplifies the justices’ holding here: (1) there’s a rebuttable presumption against contract language imposing a condition precedent, and (2) it takes clear and convincing language to rebut that presumption. If you don’t use clear and convincing language to articulate a condition precedent, judges won’t round your language up into one later.
  • The justices mention that you needn’t use any “magic words” to clearly and convincingly establish a condition precedent. But your odds are better if you do. If you want something to act as a condition precedent, then identify it as a “condition precedent.” If language must clearly and convincingly articulate a condition precedent, why not use words that articulate it beyond a reasonable doubt? (Care to wager whether this decision would have come out the same way if the subcontract said: “subcontractor recognizes that owner payment to prime contractor for subcontractor’s work is a condition precedent to prime contractor’s duty to pay subcontractor for that work.”?)
  • When to pay if pay-when-paid? The justices’ decision leaves the reader with this lingering question: when is the deadline for the prime to pay the sub? If the prime contractor’s obliged to pay the subcontractor five days after the owner pays they prime—and the owner never pays the prime—then when does that five days start? This decision doesn’t answer that question; it doesn’t really address it. That’s for the lower court to contend with after remand.

But this decision obliquely refers to what will likely guide the way to that answer: comment b to Section 227 of the Restatement (Second) of the Law of Contracts. That commentary says that under a “pay-when-paid” contract where owner to prime contractor payment never happens, the prime contractor must pay the subcontractor within a “reasonable” time.

What’s reasonable time? Sounds like an issue to litigate before the lower court. Sounds like a factual issue, unlikely to resolve on summary judgment. Sounds protracted. Sounds expensive too.

  • Lastly, as a reader, big thanks to Justice Jesse Reyes and his colleagues for how they referred to the litigants in this decision. They made it easier to read and navigate.  This decision refers to each litigant by their role in the case that affects its outcome: “Subcontractor,” “Contractor,” and “Owner.” Us readers needn’t divert scarce attention to remembering which company name refers to the subcontractor, which to the prime, which to the owner, etc. And we needn’t toggle from mid-decision back to the top to refresh our recollection on whether the subcontractor was the plaintiff, a defendant, counterdefendant, appellant, petitioner, etc. Who filed the complaint affects the outcome in a decision about whether they adequately alleged their claims or filed before a limitations or repose period expired, but often—including here—it makes no difference. And referring to the cast by plaintiff, defendant, etc. labels puts more work on weary readers. The justices on this panel deserve thanks for sparing us that that here.