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A “pay-if-paid” clause was enforceable to deprive a subcontractor (Sub) to sue the general contractor (GC) for withheld retainage where the project owner, a condominium developer, failed to pay the balance it owed to the general contractor which would have included payment for the sub’s retainage.  The Alabama Supreme court in Lemoine Company v. HLH Constructors, Inc., 62 So.3d 1020 (AL, 2010), stated that the contract clause made payment from the owner to the GC an absolute condition-precedent to the GC’s duty to pay the Sub.  The Sub argued that a separate “pay-when-paid” clause in the same contract required payment within 30 days regardless of whether the GC was ever paid.  The court rejected that argument and also rejected the Sub’s argument that it could recover under the theory of Quantum Meruit.  Allowing quantum meruit recovery would render the “pay-if-paid” clause meaningless and be contrary to the clearly expressed intent of the parties to the contract.  Moreover, according to the court, “when an express contract exists, an argument based on quantum meruit recovery in regard to implied contract fails.”   Where the parties clearly agreed upon their respective rights and liabilities in the contract, the “law will permit the enforcement of that agreement as written.”   “This Court has consistently held that the freedom to contract is an inviolate liberty interest.”

The “pay-if-paid” clause of paragraph 5 of the contract provided the following:

Notwithstanding anything else in this Subcontract or the Contract Documents, the obligation of [GC] to make any payment under this Subcontract … is subject to the express and absolute condition precedent of payment by [Vista Bella]. It is expressly agreed that [GC] and its surety shall have no obligation to pay for any work done on this Project, until [GC] has received payment for such work from [Vista Bella].[Sub] expressly assumes the risk of nonpayment by [Vista Bella].

             The GC argued that the above-quoted language clearly states that the Sub assumed the risk of nonpayment by the Developer to the GC and that the condition precedent in that paragraph is enforceable.  The court agreed, finding:

 The facts of this case indicate that [GC] and [Sub] “knowingly, clearly, and unequivocally enter[ed] into [the subcontract] whereby they agree[d] that the respective liability of the parties [would] be determined by some type of agreed-upon formula,” namely, the condition precedent of paragraph 5; therefore, “Alabama law will permit the enforcement of [the subcontract] as written,” and Vista Bella’s payment to [GC]under the general contract is an enforceable condition precedent to [Sub’s] right to payment under the subcontract.

             The Sub argued that the condition precedent in paragraph 5 conflicts with the “pay-when-paid” clause of paragraph 4 of the subcontract and that “the conflict should be resolved in favor of the prior clause.”  Paragraph 4 provided, in pertinent part, that “a final payment, consisting of the unpaid balance of the Price, shall be made within 45 days after the last of the following to occur: (a) …; (b) …; (c) Final payment by [Developer] to [GC] under the Contract on account of the Work.”

The court did not see any conflict between the two clauses, but instead found that the “pay-when-clause” does not create a right that was expressly waived by the very clear “pay-if-paid” provision which served as an absolute condition precedent to the right to any payment.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 14, No.2 (Feb 2012).

Copyright 2012, ConstructionRisk.com, LLC