Pay if Paid Clause Upheld
Submitted by Kent B. Scott
The United States District Court (New Jersey) has upheld the terms of a general contractor's paid if paid clause. The Court dismissed the subcontractor's claim against the general contractor for breach of contract as well as the subcontractor's claim against the general contractor's payment bond surety. The court found that the language clearly provided that the subcontractor assumed the risk of the owner's nonpayment and that owner payment was a condition precedent to the contractor's obligation to pay the subcontractor.
A contractor hired a subcontractor to perform plumbing work for a housing project in Princeton, New Jersey. Upon completion of its work, the subcontractor requested payment of both the retainage and amounts for changed work outside the contract's initial scope. The contractor refused to pay because it had not received final payment from the owner. The subcontract included the following clause:
5.3 Pay When Paid-Subcontractor agrees that Contractor shall never be obligated to pay Subcontractor under any circumstances, unless and until funds are in hand received by Contractor in full, less applicable retainage, covering the Work or material for which Subcontractor has submitted an Application for Payment. This is a condition precedent to any obligation of Contractor, and shall not be construed as a time of payment clause. This condition precedent also applies to Contractor's obligation to pay retainage, if any, Contractor shall never be obligated to pay retainage to Subcontractor until Contractor has received its retainage in hand in full. This paragraph governs all other portions of the Subcontract, and any conflicting language shall be modified or deemed to be consistent herewith.
The subcontractor disagreed and made a claim on the contractor's payment bond. Pointing to the pay-if-paid provision, the contractor's surety also refused to pay the subcontractor. The subcontractor filed a suit in the U.S. District Court for the District of New Jersey against the contractor and the surety.
The subcontractor argued that because the specific pay-if-paid language was not expressly incorporated into the payment bond, the surety could not rely upon it. The subcontractor cited several out-of-state opinions that found sureties could not escape liability based on pay-when-paid provisions between contractors and their subcontractors. With no New Jersey law on point, the surety cited cases of their own that showed instances where sureties used the pay-when-paid clause as a defense. The court focused on New Jersey's surety law and found that a surety's liability could only be triggered when its principal's debt matures. Having earlier found that the condition precedent (owner payment) had not been met, the court reasoned that the contractor's debt to the subcontractor had not matured, and, therefore, the surety was not obligated to pay.
Finding the pay-if-paid clause at issue enforceable and a defense to requiring payment from the contractor or surety, the court denied the subcontractor's claim against the general contractor for breach of contract as well as the subcontractor's claim against the general contractor's payment bond surety motion.
Hard Hat Case Note
Right to Arbitrate Waived For Failure to Follow Contract's Time Limitations
Submitted by Adam T. Mow
In early December of 2009, the Utah Court of Appeals issued its opinion in Deer Crest Associates I, LC v. Silver Creek Development Group, LLC, 2009 UT App 356. The court heard an appeal from a trial court's ruling that Deer Crest had waived any right to seek a remedy through the courts because it failed to timely file a demand for arbitration and the parties agreed to submit any dispute to arbitration. The Utah Court of Appeals upheld the trial court's decision. The primary lesson to be learned from this case is that parties may agree to a very short period of time in which to bring a claim, whether through litigation or arbitration. Claims not brought within that time may be rejected outright as a waiver of the right to bring the claim.
Deer Crest, a developer, and Silver Creek, a general contractor, had entered into an agreement for the construction of condominiums. The agreement contained a mandatory arbitration clause that provided that all disputes would be decided by arbitration and that the demand for arbitration had to be filed within thirty days of the dispute having arisen.
Deer Crest later terminated this agreement with Silver Creek for alleged non-performance. Deer Crest then filed a lawsuit against Silver Creek in state court. Silver Creek moved to dismiss this lawsuit, arguing that it was untimely under the thirty-day demand period in the arbitration clause. Alternatively, Silver Creek asked the court to compel arbitration. The court denied the motion to dismiss and ordered the parties to arbitrate the dispute in accordance with the agreement. The judicial proceedings were stayed pending the completion of the arbitration.
Deer Crest then commenced arbitration proceedings against Silver Creek. Silver Creek again moved to dismiss this claim, which the arbitrator granted. The arbitrator concluded that Deer Crest had failed to commence the arbitration within thirty days of the dispute having arisen, as the agreement required.
Deer Crest next returned to the state district court and filed a motion to lift the stay to allow it to litigate its claims. Silver Creek opposed this motion. The district court dismissed Deer Crest's claim against Silver Creek with prejudice and awarded Silver Creek its reasonable attorney fees.
In appealing to the Utah Court of Appeals, Deer Crest challenged the district court's conclusion that Deer Crest waived any right to litigate against Silver Creek due to the arbitration provision in their agreement. Deer Crest also argued that the district court erred in construing the thirty-day demand period in the agreement as a contractual statute of limitations or, alternatively, that thirty days is an unreasonably short period in which to make a claim.
In its analysis, the Utah Court of Appeals first rejected Deer Crest's contention that there was no evidence that it knowingly and intentionally waived the right to litigate any disputes with Silver Creek. The court explained that parties waive their right to resolution through the courts when they expressly agree to arbitrate. Moreover, where a party is contractually bound to follow procedures and timelines to take advantage of specified contractual rights, and the party fails to do so, that party waives its rights. In this case, Deer Crest had agreed to arbitration as the exclusive method of seeking a remedy for any dispute with Silver Creek. Deer Crest waived its right to arbitrate by not following the contract requirements and it does not get a second chance at resolution of the dispute through the courts.
The Court then took issue with Deer Crest's argument that the thirty-day demand period was unreasonable. Parties may contractually limit the time in which they may commence a lawsuit based on the contract, even if it is shorter than the applicable statute of limitations, as long as the limitation is reasonable. Deer Crest argued that thirty days is inherently unreasonable because parties to construction contracts would be filing demands for arbitration every thirty days and that projects would grind to a halt with all of these filings.
The court rejected that argument under the circumstances for two reasons. First, Deer Crest was the party who terminated the agreement. Consequently, it controlled the date the dispute arose and the start of the thirty-day period for bringing a claim. Second, Deer Crest willingly entered into the agreement with Silver Creek and could control the rights and duties to which it agreed, including the thirty-day period for bringing a claim.
The Court found that parties may agree to a very short period of time in which to bring a claim and those contract limitations will be enforced.
News of the Firm
- All eight members of the firm were named to the Utah Business 2010 Legal Elite in the area of Construction Law or Up and Coming Lawyers. For over ten years Utah Business has published the best of the best lawyers in their respective areas of practice. The nomination and selection process is the result of a balloting process where over 5,000 ballots were mailed to state Bar members asking them to vote for the top lawyers in the listed categories. Bar members were requested to vote for lawyers whose work they were familiar with. The votes were tallied and reviewed by a panel of judges and senior attorneys. The firm's members selected are: Robert F. Babcock, Kent B. Scott, Brian J. Babcock, Jason H. Robinson, Justin E. Scott, Cody W. Wilson, Adam T. Mow, and D. Scott DeGraffenried. No other firm in the Utah legal community had more than two lawyers named to the 2010 Utah Business Legal Elite in the area of Construction Law.
- Adam T. Mow has joined the Roster of Arbitrators and Mediators of the American Arbitration Association. Adam has also been elected Secretary of the Utah Chapter of the American Institute of Architects for 2010 and 2011.has joined the Board of Trustees of Utah Dispute Resolution, a non-profit organization providing mediation services and training in Utah.
