United States Court of Appeals Holds Pay-When-Paid Clause Valid

In Universal Concrete Products Corporation v. Turner Construction Company, parties entered into an agreement for the installation of precast concrete for a construction project. After Universal had substantially completed its work, the Granby Towers project ultimately fell through in March 2008, and Turner was unable to pay Universal for any of the work performed because Turner itself had not yet been paid by the owner. Universal sought payment of $885,507 from Turner for work performed, and Turner refused citing a pay-when-paid provision in the subcontract between Turner and Universal. Universal alleged breach of contract, specifically that when read the subcontract was “patently ambiguous” as to when Turner was required to pay Universal for work completed. Turner argues that the subcontract is unambiguous and that terms of the contract are consistent with, and supports the pay-when-paid clause in the subcontract.

Turner was awarded summary judgment and Universal appealed, raising the issue of whether or not the district court correctly found that Universal’s contract with Turner contained an unambiguous pay-when-paid clause. Pay-when-paid clauses are valid in Virginia, the state in which this litigation commenced, where the language of the contract is clear on its face. Pay-when-paid clauses may be included in a contract if there is a condition clearly showing the intent of the parties. Universal argues that the contract between Turner and the owner indicted that Turner would pay Universal before being paid by the owner. However, Universal’s interpretation ignores the remainder of the clause that indicates that payments would be made to Universal in accordance with the subcontract, and not the Turner-Owner contract.

Universal looked to OBS Co. v. Pace Constr. Corp. (1990) and MECO Sys., Inc. v. Dancing Bear Entm’t (2001) where the Florida Supreme Court and Missouri Court of Appeals held that significantly identical provisions in a subcontract and general contract were ambiguous enough to not enforce a pay-when-paid clause. However, the U.S. Court of Appeals in the instant case indicated that because of the unambiguous language in the both the Turner-Owner contract and the Turner-Universal subcontract, the intent of the parties was clearly to follow a pay-when-paid clause.

The pay-when-paid clause was valid because it was unambiguous under Virginia law, and the United States Court of Appeals for the Fourth District reaffirmed the District Court’s holding that the pay-when-paid clause contained in the Turner-Universal subcontract was enforceable and prevented Universal from demanding payment from Turner unless or until Turner is paid by the owner.

However, in West-Fair Electric Contractors v. Aetna Casualty & Surety Company (1995), the New York Court of Appeals held that, under New York law, pay-when-paid provisions requiring subcontractors to assume the risk that the owner will fail to pay the general contractor are void and unenforceable as contrary to public policy reflected in Lien Law  § 34. It was further held that a pay-when-paid clause used to merely fix time for payment and not suspend payment altogether if an owner does not pay the general contractor to be enforcable. The unenforceability of a pay-when-paid clause in New York is further supported by several cases, including North Cent. Mechanical, Inc. v. Hunt Const. Group, Inc. (2007) which held a pay-when-paid clause in a subcontract was properly construed as regulating time of payment rather than shifting risk of owner non-payment to a subcontractor, and in Bonavist v. Inner City Carpentry, Inc. (2003) which held that a pay-when-paid provision stating that a construction manager was not required to pay a trade contractor until funds were received from the owner was unenforceable as against public policy. Therefore, currently, pay-when-paid clauses are held to be against public policy, and thus unenforceable in New York.

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