In Florida, pay-if-paid clauses are enforceable, subject to the standard limitations imposed by most states that will enforce such clauses (clause must be clear that payment is contingent, etc.). In International Engineering Services, Inc. v. Scherer Const. & Engineering of Cent. Florida, LLC, 74 So.3d 531 (Fla. 5th DCA 2011), the court considered a subcontract that contained a clear and enforceable pay-if-paid clause. However, the subcontract also contained another standard clause incorporating the terms of the prime contract. The prime contract provided that the owner was not obligated to make final payment to the prime contractor until the prime contractor had fully paid all subcontractors. The Florida Court of Appeal held that this tension (subcontractors are not entitled to be paid until the GC is paid, but the GC is not entitled to be paid until the subcontractors are paid) created an ambiguity that was sufficient to render the pay-if-paid clause unenforceable.
It is fair to consider this opinion as another manifestation of judicial hostility towards pay-if-paid clauses. Certainly, a GC can expect the courts to look for any way to invalidate such clauses, even in states like Florida that are relatively generous with "freedom of contract" considerations. And the opinion also demonstrates the importance of adapting subcontract language where necessary to conform with the prime contract. Clearly, no one at the GC sat down with a copy of the prime contract and noted its payment procedures before they fired away a series of "standard form" subcontracts, and as a result, they set up a Catch-22 that, ultimately, they got caught in.
But this opinion also highlights the importance of order of precedence clauses in subcontracts. While this case presents an extreme example, it is an open question whether the Florida Court of Appeal would have reached the same conclusion if the subcontract had contained a clause that simply stated "Whenever the terms of this Subcontract are inconsistent with any term of the Prime Contract, the terms of this Subcontract shall prevail and take precedence over the terms of the Prime Contract." In such a circumstance, the Florida Court of Appeal would have had to think long and hard about how to use a term from the prime contract to make the subcontract ambiguous.
In California, to my knowledge, courts have not squarely addressed the "pay-if-paid" issue since W.M. Clarke v. Safeco (1997) 15 C4th 882 (void against public policy on private projects) and Capitol Steel Fabricators v. Mega Construction Co. (1997) 58 CA 4th 1049 (void as against public policy on public projects).
ReplyDeleteThe holding in Safeco was based on a peculiarity in the CA mechanics lien scheme, which says that a mechanic's lien is for the fair value of the work or what is due under the contract, whichever is less. The court reasoned that a "pay-if-paid" provision is an implicit abrogation of the right to lien a project, and thus void.
Many contract forms now try to finesse this issue by making the right to payment a condition subsequent; i.e. if the owner fails to make payment, the parties are to pursue their lien rights, and if that is unavailing (e.g. because the bank has the project with its priority) the duty to make payment is excused.
No court has yet addressed the validity of such clauses in California.