Maryland Court Holds that Subcontract Requirement of Passing Through Subcontractor’s Claims Against Owner Does Not Create “Pay-When-Paid” Condition; Prime Contractor Remains Liable for Payment

Richard F. Kline, Inc. v. Shook Excavating & Hauling, Inc.
165 Md. App. 262, 885 A.2d 381, 2005 Md. App. LEXIS 273 (Maryland Ct Spec. App., October 31, 2005)

Richard F. Kline, Inc. (“Kline”) contracted with the City of Frederick, Maryland (the “City”) for the construction of a flood control project. Kline subcontracted with Shook Excavating & Hauling, Inc. (“Shook”) to perform a portion of the excavation work. The subcontract did not contemplate Shook’s removal of any contaminated soils. When such soils were discovered, the City and project engineer directed Kline to begin remediation. Kline in turn requested that Shook perform this work, and Shook did so. Eventually, the Maryland Department of the Environment determined that the soils were not in fact contaminated. Disagreeing with this determination, however, Kline and Shook continued to remediate the soil before using it as backfill.

The City rejected Kline’s request for compensation for Shook’s remediation work. Kline then unsuccessfully sued the City attempting to recover this payment. Finally, Shook in its own right sued Kline seeking payment for its work. Kline claimed the subcontract precluded the suit because of the City’s denial of Kline’s claim. The subcontract required that Kline would prosecute any claim Shook may have had against the City, that Shook would be bound by the City’s decision, and that “[Shook] hereby waives any rights it otherwise might have against [Kline], and agrees never to look to [Kline] for payment on account of such claim ….”

Kline contended that provision made any payment from Kline to Shook conditional upon payment from the City to Kline, i.e., a “pay-when-paid” clause. The Maryland Court of Special Appeals affirmed the trial court’s rejection of this argument. The court noted that the existence of an express condition depends upon the intent of the parties as evidenced by the language of the contract. The court stated that, although no specific language is necessary to create an express condition, words such as “if,” “provided that,” “when,” “after,” “as soon as,” or “subject to” are typically used, but were not present in the contested subcontract provision. The court also contrasted a prior case upholding a “pay-when-paid” provision which explicitly made payment from the owner a “condition precedent” to contractor’s payment to its subcontractor. Finally, the court noted that contract language is construed against finding a condition where doing so would result in forfeiture by one party.

Additionally, the court rejected Kline’s argument regarding the Subcontract requirement that Shook perform its work under the direction of the City or the project engineer. Consequently, Kline maintained, Kline could not be liable for Shook’s violation of this clause by proceeding with remediation at Kline’s own direction. The court instead found that the parties had orally modified that provision. Both parties agreed that Kline supervised Shook and that Shook took all of its orders from Kline throughout the project. Under Maryland law, such conduct could modify the terms of the agreement even though the contract specified that all modifications must be in writing. As such, the court found Kline liable for payment based on its request that Shook perform the work.

This entry was posted in Payment dispute, Subcontract and tagged , , , , . Bookmark the permalink.