• Payment: If vs. When
  • September 24, 2015 | Author: Jacob E. Roussel
  • Law Firm: Breazeale, Sachse & Wilson, L.L.P. - Baton Rouge Office
  • While most contractors are familiar with “pay-if-paid” and “pay-when-paid” clauses, some courts in Louisiana are still confusing the considerable difference between these types of contractual payment provisions. However, in the recent case of Tymeless Flooring, Inc. v. Rotolo Consultants, Inc., 2014-1392 (La. App. 4 Cir. 5/20/15), the Louisiana Fourth Circuit Court of Appeal provided a fairly thorough analysis distinguishing the two.

    The case involved a lawsuit filed by a sub-subcontractor against a subcontractor for breach of contract seeking payment for work performed on a YMCA project located in New Orleans. In response to the suit, the subcontractor asserted that it had not received payment from the general contractor and that its contract with the sub-subcontractor contained a “pay-if-paid” clause. On that basis, the subcontractor argued that the sub-subcontractor could not proceed against it with the lawsuit. The trial court agreed and dismissed the claim. The Court of Appeal reversed the ruling finding rather that the contract contained a “pay-when-paid” provision.

    The Fourth Circuit explained that “[t]he narrow issue presented is whether the payment provision in the construction contract between the parties is a ‘pay-when-paid’ clause—a term of payment—or a ‘pay-if-paid’ clause—a suspensive condition.” To explain the significant distinction between the types of clauses, the Court cited a commentator’s clarification as follows:

    A “pay-when-paid” clause governs the timing within which a general contractor must remit payment to its subcontractor, linking the general contractor's receipt of payment from the owner to the general contractor's payment to the subcontractor. Under this type of provision, the general contractor must make payment to the subcontractor within a reasonable time, even if the general contractor does not receive payment from the owner.

    The more restrictive “pay-if-paid” clause, however, does not govern the timing of a general contractor's payment obligation, but rather dictates whether such payment obligations exist at all. Where there is a valid “pay-if-paid” provision in the contract, the general contractor is only required to pay the subcontractor if and to the extent that it receives payment from the owner for the subcontractor's work. Thus, under a “pay-if-paid” provision, there is a transfer of risk of the owner's nonpayment from the general contractor to the subcontractor.[1]

    The Court then explained that the determinative factor is the language in the contract and that to enforce a “pay-if-paid” clause, the clause must contain “clear and unequivocal language set forth unambiguously on the face of the contract.” The Court provided the following examples of language which other courts have upheld as valid “pay-if-paid” clauses: “(1) payment to the contractor is a condition precedent to payment to the subcontractor; (2) the subcontractor is to bear the risk of the owner's nonpayment; or (3) the subcontractor is to be paid exclusively out of a fund the sole source of which is the owner's payment to the subcontractor.”[2] On the other hand, the following is an example of a contractual provision which the Louisiana Supreme Court held constituted a “pay-when-paid” clause: “Contractor shall pay to Subcontractor, upon receipt of payment from the Owner, an amount equal to the value of Subcontractor's completed work, to the extent allowed and paid by Owner on account of Subcontractor's Work.”[3]

    While the variation between the language in the above examples may seem insignificant, their effects certainly are not. For example, in the 2011 case of Coastal Dev. Grp., L.L.C. v. Int'l Equip. Distributors, Inc., 2010-1202 (La. App. 1 Cir. 2/11/11), a subcontractor filed suit against the general contractor and the Parish of Livingston after performing debris removal work following Hurricane Gustav. It was undisputed that over four-hundred thousand dollars remained unpaid to the subcontractor. However, finding that the subcontract contained a “pay-if-paid” clause and that the work had not been approved and paid for by FEMA, the Court held that the subcontractor’s lawsuit was premature and dismissed the case. The Court explained that “[w]hile this court is sympathetic to the plight of [the subcontractor] because they performed the work and should be paid for it, according to the unambiguous language of the subcontract, until the work is deemed eligible by FEMA and actual receipt of payment from the Parish to [the general contractor], the right of the subcontractor to demand payment is premature.”

    While these cases may seem inconsistent at first glance, the outcomes are governed by the language in the contract between the parties. Particular attention must always be given to such a payment provision to determine if you are agreeing to a “pay-if-paid” vs. a “pay-when-paid” clause.

    [1] Citing Ronald P. Friedberg, “PAY-IF-PAID” CONTRACT PROVISIONS, Providing Some Enforcement Consistency and Predictability in an Unsettled Area of Law, 57 No. 2 DRI For Def. 23 (2015).

    [2] It is noteworthy that the case of Glencoe Educ. Found., Inc. v. Clerk of Court & Recorder of Mortgages for Parish of St. Mary, 2010-1872 (La. App. 1 Cir. 5/6/11), 65 So. 3d 225, held that a general contractor’s surety could not assert the contractor’s “pay-if-paid” defense to defeat the surety’s liability to pay subcontractors pursuant to the terms of the statutory payment bond (at least on a public project).

    [3] S. States Masonry, Inc. v. J.A. Jones Const. Co., 507 So. 2d 198 (La. 1987).