"Pay-if-Paid" Provision in Subcontract Was Vitiated by a Provision of the Prime Contract Incorporated by Reference

In International Engineering Services, Inc. v. Scherer Construction & Engineering of Cent. Florida, LLC, a steel subcontractor (the “Subcontractor”) entered into a subcontract (the “Subcontract”) with a general contractor (the “Contractor”) to perform structural steel work on a project in Florida.  The Subcontractor performed all of the work required, but did not receive payment from the Contractor.

The Subcontractor sued the Contractor and sought the entire unpaid amount of the Subcontract.  Contractor contended that the Subcontract contained a “pay-if-paid” provision, which provided that payment by the Project Owner to the Contractor was an express condition precedent to any obligation of the Contractor to pay the Subcontractor, and because the Owner had not paid the Contractor, the condition precedent to the Contractor’s obligation to pay the Subcontractor had not occurred, and payment was not due.

The trial court found that the Subcontract language was not ambiguous and was clearly meant to shift the burden of non-payment from the Contractor to the Subcontractor.  The Subcontractor appealed.  The Florida Appellate Court reversed.

In rendering its opinion, the Appellate Court relied upon the provision of the Subcontract, which incorporated by reference the terms of the Prime Contract.  The Prime Contract provided:

“Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner’s property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.”

This provision provided that the Owner was not obligated to pay the Contractor until the Contractor paid all of its subcontractors.  By incorporating the Prime Contract into the Subcontract, the “pay-if-paid” provision became ambiguous.  This ambiguity had to be resolved against Contractor and interpreted as a establishing a reasonable time for Contractor to pay Subcontractor.  Thus, the “pay-if-paid” provision did not bar the Subcontractor’s entitlement to payment from Contractor.

Courts tend to bend over backward to get around these “pay-if-pay” provisions. For more information regarding the “pay-if-pay” (and “pay-when-pay”) provisions, see our blogs dated March 17, 2008 and April 5, 2011.

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