Waiting to Get Paid: Are Pay When Paid Provisions a Matter of When or If?
C ontractors often desire to shift the risk of an owner’s nonpayment to subcontractors. Shifting the risk of an owner’s possible nonpayment from one party to another is neither simple nor guaranteed. Unsuspecting parties can quickly find themselves locked into an agreement containing a payment provision susceptible to conflicting interpretations. What the parties intended, and thought they understood, may in fact not be what they obtain.
For example, in J.J. Shane v. Aetna Casualty & Surety Company, 723 So.2d 302 (Fla. 3d DCA 1998), reh. den. , a subcontractor found itself in the unexpected position of waiting to get paid until the party with whom it contracted was paid by the owner. The dispute involved the interpretation of the following payment provision contained in the written subcontract between the parties:
Article XIII Method of Payment
a) Subcontractor is relying upon the financial responsibility of Owner in performing the Work. It is understood by Subcontractor that payment for the work is to be made from funds received from Owner by Contractor in respect to the Work.
The subcontractor argued that the foregoing term simply fixed a reasonable time for payment by the contractor.1 Florida’s Third District Court of Appeal rejected that argument, holding instead that the subject provision plainly and unambiguously made payment by the owner a condition precedent to payment by the general contractor to the subcontractor.2
Such payment provisions in construction contracts are commonly referred to as “pay-when-paid” clauses. While seemingly straightforward at first glance, many are actually ambiguous. The “pay-when-paid” language can be interpreted on the one hand as establishing a condition precedent in which payment must first be received from the owner before it can be paid out to the service provider, or, on the other hand, as simply fixing a reasonable time frame for when payment is to be made.3 When interpreted as a condition precedent, the provider will get paid only after payment by the owner. However, when seen as fixing a reasonable time frame for payment, the “pay-when-paid” language is treated as an absolute, unconditional promise by the general contractor to pay the subcontractor, with the understanding that the payment may be delayed for some reasonable time while the general contractor obtains payment from the owner.
More often than not, a service provider who thought he or she had secured a definite promise of payment realizes too late that, in fact, no payment will be forthcoming unless the general contractor receives payment from the owner. The question is, can the intent of either party alter the individual outcome of these cases? Contrary to what one might expect, when it comes to construing these “pay-when-paid” provisions, most jurisdictions, including Florida,4 have precluded the trier of fact from determining what the parties actually intended on a case-by-case basis.
Intent of the Parties
Ordinarily, the interpretation of a written contract is a matter of law to be determined by the court.5 In cases in which the terms of a contract are ambiguous, however, the intention of the parties plays a pivotal role in determining which interpretation applies. In such situations, the actual intention of the parties is submitted to the jury as a question of fact.6 Although this principle of law is applied in most situations, disputes between contractors and subcontractors over ambiguous “pay-when-paid” provisions are treated as the exception.7 In that scenario, the question about what the parties actually intended is determined as a matter of law.8 The explanation provided by the Florida Supreme Court in Peacock Construction Co. v. Modern Air Conditioning, Inc., 353 So.2d 840 (Fla. 1977), for its departure from the general rule is based on the supposed predictability and nature of the transaction.
If an issue of contract interpretation concerns the intention of the parties, that intention may be determined from the written contract, as a matter of law, when the nature of the transaction lends itself to judicial interpretation. A number of courts, with whom we agree, have recognized that contracts between small subcontractors and general contractors on large construction projects are such transactions. The reason is that the relationship between the parties is a common one and usually their intent will not differ from transaction to transaction, although it may be differently expressed.
That intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay the subcontractors. This is because small subcontractors, who must have payment for their work in order to remain in business, will not ordinarily assume the risk of the owner’s failure to pay the general contractor.9
Such reasoning was drawn from a case in which the written contract required the general contractor to make payment to its subcontractors: “within thirty (30) days after completion of the work included in this subcontract, written acceptance by the Architect and full payment therefor by the Owner.”10
After finding that this payment provision was ambiguous, the Florida Supreme Court held, as a matter of law, that payment by the owner was not a condition precedent to the subcontractor’s right to receive payment.11
Although, Peacock Construction Co. v. Modern Air Conditioning, Inc., is still good law, it does raise some interesting issues. Because the court focused “on contracts between small subcontractors and general contractors on large construction projects” then is one to assume that the Peacock precedent need not apply to disputes arising from small construction projects? And what exactly is the definition of a “large construction project”? If applied as a bright line rule to all transactions between contractors and subcontractors, however small they or the construction job might be, then does the Peacock rule unfairly favor one party over the other? Unfortunately, the reported cases over some twenty years that have followed Peacock have yet to address these issues.
Ambiguity Construed Against General Contractors
The court in Peacock did recognize that nothing prevents parties from shifting the risk of an owner’s nonpayment provided the contract expressly and unambiguously states such intent.12 The burden of clear expression is on the party seeking to pay only when paid,13 and any ambiguity will be construed against it as a matter of law.
A complication occurs when the general contract and accompanying general conditions between the owner and the prime contractor are expressly included as part of any subcontract. If any inconsistency exists between these two contracts, then an ambiguity has been created,14 since it is a generally accepted rule of contract law that, when a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing.15
In OBS Co., Inc., v. Pace Const. Corp., 558 So.2d 404 (Fla. 1990), the contract between the general contractor and the subcontractor clearly provided that the subcontractor was to be paid only after the owner paid the general contractor. The contract between the general contractor and the owner, however, was a “cost plus” or reimbursement type contract that required the general contractor to pay its subcontractors before the owner reimbursed the general contractor. The owner’s general conditions also required that before final payment became due, the general contractor was to submit an affidavit certifying that all subcontractors had been paid. This inconsistency was construed against the general contractor.16 The court found that when the subcontract was read in conjunction with the general contract and its conditions, a sufficient ambiguity existed which prevented the general contractor from effectively shifting the risk of the owner’s nonpayment to its subcontractors. To its dismay, the general contractor remained liable for the final payments owed to its subcontractors.
The bottom line is that risk shifting requires clarity, consistency within all of the documents in a transaction, and knowledge of the law governing payment provisions in construction contracts. A “pay-when-paid” clause, if intended to create a precondition to payment—as opposed to a reasonable time frame when payment will be made—must be free of any ambiguity and must establish by its express terms that payment by the owner is a condition precedent to any requirement on the part of one party to pay the other. way of example, this provision has been held not to be a contingent payment clause: “Under no circumstances shall the contractor be obligated to pay the subcontractor until funds have been advanced by the owner.”17
The contractor’s argument that the following subcontract term shifted the risk of the owner’s nonpayment or delayed payment to the subcontractor has also been rejected: “Subcontractor shall be entitled to receive all progress payments and the final payment within ten working days after contractor receives payment for such from the owner, except as otherwise provided in the conditions.”18
However, the following provisions have been found to shift the risk:
Final payment, inclusive of retention, shall be made within thirty days of completion of the construction project, acceptance of same by the owner, and as a condition precedent, receipt of final payment of [subcontractor] from the owner.. . .19
When all work has been finally accepted by the Architect and [general contractor], final payment is contingent upon payment to the Contractor and shall be made within thirty (30) days after said payment from the Owner, provided the Subcontractor has previously furnished complete releases of lien and evidence of paid material bills.20
Sureties are also not immune from this predicament. They may find out too late that the language set forth in their bonds may not be sufficient to protect them from claims by subcontractors for payment. Often, payment bonds furnished by a surety to a contractor contain the legend specified in F.S. §713.245, for conditional payment bonds (bonds which condition payment to a subcontractor upon payment to the contractor):
This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.21
Although the form of bond may comport with the statutory requirements, the bond will, nevertheless, be treated as a payment bond under F.S. §713.23, as to lienors having no “pay-when-paid” clause in their subcontract.22 While it has been asserted that the bonds must be deemed conditionally restricted because they contain the above statutory legend limiting coverage to instances where an owner has paid the general contractor, this argument has been rejected in light of the first sentence of §713.245(1), which reads:
Notwithstanding any provisions of §§ 713.23 and 713.24 to the contrary, if the contractor’s written contractual obligation to pay lienors is expressly conditioned upon and limited to the payments made by the owner to the contractor, the duty of the surety to pay lienors will be coextensive with the duty of the contractor to pay.. . .
Recognizing that the protection of §713.245 does not arise unless express conditional payment language is contained in the general contractor’s actual subcontract, it has been held that the mere presence of such 713.245 language within a bond will not free the surety from having to pay up when its principal’s underlying contract did not contain express and unambiguous contingent payment language.23 In the absence of such conditional language, and provided the bonds comply with §713.23, they will be considered, construed, and applied as unconditional 713.23 bonds.24 Thus, under the present statutory scheme, a surety shall be liable to the same extent as the contractor.
Too often, more time is spent bidding a project than actually reviewing the agreement, which formalizes a party’s selection to perform the work. As often, “pay-when-paid” provisions are not discovered or really understood until the parties are well into a job. then, it is normally too late and too costly to do what could have and should have done at contract negotiation. q
1 Id. at 303.
3 DEC Elec., Inc. v. Raphael Const. Corp., 558 So.2d 427, 429 (Fla. 1990).
4 Peacock Construction Co. v. Modern Air Conditioning, Inc., 353 So.2d 840 (Fla. 1977); see also, DEC Electric, Inc. v. Raphael Construction Corporation, 558 So.2d 427 (Fla. 1990).
5 Peacock, 353 So.2d at 842; City of Leesburg v. Hall, 96 Fla. 186, 191, 117 So. 840, 841 (1928); City of Orlando v. H.L. Coble Construction Co., 282 So.2d 25, 26 (Fla. 4th D.C.A.), cert.denied, 288 So.2d 505 (Fla. 1973); 4 S. Williston, A Treatise on the Law of Contracts §616 (3d ed. 1961).
6 Peacock, 353 So.2d at 842.
9 Id. (emphasis added).
13 Dyser Plumbing Co. v. Ross Plumbing & Heating, Inc., 515 So.2d 250, 252 (Fla. 2d D.C.A. 1987).
14 OBS Co., Inc. v. Pace Const. Corp., 558 So.2d 404 (Fla. 1990). See also Harris Air Systems, Inc. v. Gentrac, Inc., 578 So.2d 879 (Fla. 1st D.C.A. 1991) (holding that when final payment provisions of a general contract and subcontract were in conflict and created ambiguity regarding when subcontractor was entitled to payment by general contractor, ambiguity was required to be resolved against the general contractor and interpreted as establishing reasonable time for general contractor to delay in paying subcontractor while awaiting payment from owner).
15 J.M. Montgomery Roofing Co. v. Fred Howland, Inc., 98 So.2d 484, 486 (Fla. 1957); United States Rubber Products v. Clark, 145 Fla. 631, 200 So. 385 (1941); McGhee Interests, Inc. v. Alexander National Bank, 102 Fla. 140, 135 So. 545 (1931), all cited with approval in OBS Co., Inc. v. Pace Const. Corp.,558 So.2d 404 (Fla. 1990)..
16 OBS, 558 So.2d at 404.
17 Gulf Construction Co. v. Self, 676 S.W. 2d 624 (Tex. App. 1984), cited to in Sharp v. Machry, 488 So.2d 133 (Fla. 2d D.C.A. 1986).
18 Bentley Const. Development & Engineering, Inc. v. All Phase Elec. & Maintenance, Inc., 562 So.2d 800 (Fla. 2d D.C.A. 1990).
19 Dyser Plumbing Co. v. Ross Plumbing & Heating, Inc., 515 So.2d 250, 842 (Fla. 2d D.C.A. 1987).
20 Robert F. Wilson, Inc., et al. v. Post-Tensioned Structures, Inc., 522 So.2d 79 (Fla. 3d D.C.A. 1988).
21 Fla. Stat. §713.245(1)(1998).
22 North American Specialty Ins. Co. v. Hughes Supply, Inc., 705 So.2d 616 (Fla. 4th D.C.A. 1998).
23 Id. at 618.
Patrick C. Barthet received his B.A. from Fordham University in 1968, his M.A. in 1971 from New York University and his J.D. in 1979 from the University of Miami School of Law.
Nadine Hope Goodman obtained her J.D., cum laude, in 1991 from the University of Miami School of Law and her B.A., cum laude, in 1987 from Florida International University. Both authors are associated with the law firm of Patrick C. Barthet, P.A. With six attorneys and offices in Miami and the Florida Keys, the firm concentrates on commercial litigation, including construction claims.
This column is submitted on behalf of the Trial Lawyers Section, Michael G. Tanner, chair, and D. Keith Wickenden, editor.