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Construction subcontracts frequently contain “pay-if-paid”
clauses which, if enforceable, excuse a general contractor
from paying its subcontractors until the general contractor
receives payment from the owner for the subcontractor’s
work. This insulates the general
contractor from paying the subcontractor
out-of-pocket and shifts the
risk of owner non-payment from the
general contractor to the subcontractor.
The validity of such pay-if-paid
clauses varies from state-to-state, as
some states find such provisions to
be unfair to subcontractors and,
therefore, against public policy and
unenforceable. Recently, such a
conditional payment provision was
considered in Universal Concrete
Products Corp. v. Turner Construction
Co., Civil Action No.
2:08cv298, (E.D. Va. 2009).
In Universal Concrete, the general
contractor entered into a subcontract under which the subcontractor
agreed to fabricate certain precast architectural
concrete for a new residential project. The parties further
agreed, in relevant part, that “[t]he obligation of [the general
contractor] to make a payment under this Agreement…is
subject to the express condition precedent of payment therefor
by the Owner.”
The subcontractor commenced work in July 2007. The subcontractor
continued performing until February 2008. Apparently,
in the fall of 2007, the owner began experiencing
financing issues of which the general contractor was made
aware. Nonetheless, the general contractor permitted its subcontractors
to continue working until March 2008, at which
point the general contractor notified the subcontractor that
the owner had stopped work on the project.
Having not been paid for its work, the subcontractor demanded
payment and eventually filed suit against the general
contractor. Among other claims, the subcontractor alleged
that the general contractor breached the subcontract by
failing to make timely payments and by failing to deal with
the subcontractor in good faith, an implied obligation of any
contracting party.
In response, the general contractor filed a motion for summary
judgment. Addressing the breach of contract claim, the
general contractor contended that it was entitled to summary
judgment because it had not been paid by the owner for the
subcontractor’s work and, therefore, pursuant to the pay-ifpaid
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language of the subcontract, no payment was due. The
court agreed with the general contractor’s statement of the
law finding that Virginia contracts (construction or otherwise)
must be construed and enforced as written, without
adding terms that were not included by the parties. The court
explained that, because the general contractor and subcontractor
had agreed to a subcontract including clear and unambiguous
pay-if-paid terms, the court was required to enforce
that contractual provision. As the evidence before the
court indicated that the owner had not made payment to the
general contractor for the work performed by the subcontractor,
the court granted the general
contractor’s motion for summary
judgment as to the subcontractor’s
breach of contract claim.
Next, the court considered the subcontractor’s
breach of good faith claim.
As a general rule, every contract includes
an implied covenant that the
parties will act in good faith with each
other. In Universal Concrete, the subcontractor
alleged that the general
contractor breached this implied duty
because it knew of the owner’s financial
problems and, despite this knowledge,
allowed the subcontractor to
continue its work on the project. The
general contractor sought to dismiss
this claim on the basis that it claimed to have notified the
subcontractor of the financing issues and alleged that the
owner’s stop-work order applied only to on-site construction,
not off-site fabrication of precast concrete panels. Accordingly,
the general contractor sought summary judgment
on the subcontractor’s claim on the basis that it did not act
in bad faith. The court concluded, however, that it could not
grant the general contractor’s motion for summary judgment
on this claim because there were a number of factual
questions yet to be determined; thus, the claim was not ripe
for adjudication at this stage of the litigation. Accordingly,
the court allowed the subcontractor’s breach of good faith
claim to proceed to trial. However, at trial the court ruled
that the subcontractor failed to prove that the contractor
breached the duty of good faith
While the subcontractor’s appeal of the trial court’s decision
is pending, the court’s ruling in Universal Concrete
Products v. Turner Construction highlights the adverse effect
of a pay-if-paid provision on a subcontractor’s ability
to recover on a breach of contract claim.
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(continued from page 4)
from denial of that motion—regardless of whether the litigant
is in fact eligible for a stay.” The underlying merits of
a request for a stay are irrelevant and an appellate court
even has jurisdiction over frivolous claims for a stay.
As many construction contracts include arbitration language,
Arthur Andersen will have a lasting impact on the
industry, insofar as it confirms that nonparties to the agreement
may be able to compel arbitration of disputes arising
under the construction contract and that a party seeking to
compel arbitration may immediately appeal an adverse decision.
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