Client Alerts
March 27, 2014

Pay-If-Paid Not Easily Waived

Stites & Harbison Client Alert, March 27, 2014

Pay-if-paid clauses in construction contracts are intended to shift the risk of owner nonpayment for a subcontractor’s work to the subcontractor, so that the general contractor is not obligated to pay if he is not paid by the owner. These clauses are enforceable in some states and not in others. In Georgia, a clearly drafted clause is enforceable. However, a recent court decision went further and announced that such a clause cannot be waived unless the evidence is so “clear and unmistakable” as to “exclude any other reasonable explanation.” Vratsinas Construction Co. v. Triad Drywall, LLC, 321 Ga. App. 451, 739 S.E.2d 493 (2013).

The case involved a drywall subcontractor’s payment claim against the general contractor on a shopping center construction project. The subcontract contained a pay-if-paid provision that payments were “expressly and unequivocally contingent upon … receipt of payment from Owner for the Subcontract Work.” It also provided that the subcontractor “expressly acknowledges that it relies on payment under the Subcontract on the creditworthiness of Owner, and not that of Contractor,” and the Owner’s acceptance of the work and payment to the GC were “express, independent conditions precedent to any obligation” of the GC to pay the subcontractor.

The GC defended the claim based on the pay-if-paid clause and nonpayment by the owner, and the subcontractor argued that the clause was waived. There was evidence that the subcontractor’s co-owner met with the GC’s project manager when concerns arose about the project owner’s solvency and ability to pay. According to the subcontractor, the GC told the subcontractor not to worry about the owner’s finances and to keep working, and the GC would pay the subcontractor from its own pocket if necessary. Thereafter, the GC paid the subcontractor’s next pay request in full, even though the GC was not paid in full by the owner. However, the GC did not pay seven subsequent pay requests totaling more than $465K based on nonpayment by the owner.

The trial judge decided that there was a question of fact as to whether there was a waiver of the pay-if-paid clause and let the jury decide the question. The jury returned a verdict in favor of the subcontractor for $465K plus interest. On appeal, however, the judgment was reversed.

The appellate court reasoned that a waiver of an important contract right would not be inferred unless the waiver was “clear and unmistakable. And because waivers are not favored under the law, the evidence must so clearly indicate an intent to waive the right as to exclude any other reasonable explanation. Under this standard, the evidence of waiver was insufficient to create a jury issue. Therefore, the trial court should have entered judgment for the GC.

Even though there was evidence that the subcontractor was told to keep working and he would be paid, and even though a jury was persuaded by the evidence, the appellate court concluded the claim was barred by the pay-if-paid clause. The costly lesson for this subcontractor is instructive for others. If you have a pay-if-paid provision in your contract and you think the general contractor has agreed to pay you despite owner nonpayment, get it in writing.

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