Originally posted 2011-11-04 09:00:46.
On numerous occasions, I have discussed the need to be careful with so-called “pay if paid” clauses in construction contracts. While such clauses are enforceable in Virginia (when phrased correctly), there are exceptions and limitations (for instance in the Miller Act context).
One such exception (that I frankly would have thought to be obvious) is that such clauses do not protect a general contractor from paying all subcontractors. Such a clause only protects a general contractor from payment to those subs for whose work the general contractor has not been paid. In other words, if a general contractor has been paid by an owner for a particular subcontractor’s work, it cannot use the pay-if-paid clause to deny payment even in the event that other subcontractors were deficient in their work or the owner has failed to pay the general contractor in full.
In Precision Contractors Inc. v. Masterbuilt Companies Inc. (PDF) the Fairfax, VA Circuit Court reiterated this principle stating that nothing in the contract suggests that either party to the lawsuit had any intention to shift the risk of non-payment by the owner or non-performance of other subcontractors to the plaintiff (Precision).
While this may seem obvious, the more interesting question in my mind is whether the Court would have enforced a provision in the contract that in fact shifted all of the risk downhill in the manner described above. We are in Virginia where the contract is king so I’m not sure that such a clause, correctly drafted, would not be enforced. Fairness would dictate that a performing subcontractor should not bear the weight of poor or untimely performance by its fellow subcontractors, but subcontractors must be wary of contractual language that may make them do just that.
The Fairfax court restated what we all would think is the law, however, it left the door open to enforcing some strongly pro-general contractor language in contracts. For this reason, whether you’re a subcontractor, supplier, or general contractor, you should consult with an experienced Virginia construction lawyer in order to protect your interests.
As always, I welcome and encourage your comments below, please share your thoughts. Also, please subscribe to keep up with the latest Construction Law Musings.
I think your last point about consulting a construction lawyer is the most important point you make and the take-away point. If you’re a subcontractor or general contractor and you’re about to sign a contract, get a lawyer to review it and get advice. It could save a great deal of problems in the long run.
In my jurisdiction (and I’m sure it’s the same elsewhere), construction litigation is extremely common and can be very complex due to many parties and many contracts involved. This complexity results in huge litigation costs – much of which could be avoided if a construction lawyer reviews and negotiates contracts at the front-end.
Thanks for checking in.
That’s a very interesting blog entry. I am amazed at how many states enforce the “pay when paid” provision; here in Georgia, it can be enforced, but there are not many published decisions, and I see a great deal of opportunity for litigation to either flesh out the details or overrule it entirely.
Recently, we heard of a case where the general contractor was a subsiduiary of the project owner. The project owner declared bankruptcy, did not pay itself as GC, and then relied upon the “paid when paid” provision in order to avoid paying the subcontractors and suppliers. As far as I know, most of the parties ended up settling or releasing their claims as litigation costs where too high. To reiterate your comments, every contract should be renewed by a knowledgable lawyer before they are signed.
Thanks for the insight into GA law!
Thanks for taking the time to do this blog. As a subcontractor I have enlisted the help of legal advise in the past paying for contract reviews, and then still needing to alter those ‘pay when paid’ terms myself when my lawyer didn’t. Having this resource will be very helpful making sure I also look for other things in the future.
Thanks for checking in Laura. Glad to have a new reader!