Terms Of Subcontract Containing A “Pay-If-Paid” Clause Enforceable Under Both Texas And New Mexico Law

MidAmerica Construction Management, Inc. v. MasTec North America, Inc., et al.
2006 U.S. App. Lexis 3022 (10th Cir. 2006)

In MidAmerica Construction Management, Inc. v. MasTec North America, Inc., et al., 2006 U.S. App. Lexis 3022 (10th Cir. 2006), the Court held that a subcontract agreement contained a “pay-if-paid” clause, and that the clause in question was enforceable under both Texas and New Mexico law. As a result, general contractors did not need to pay the subcontractor for the work that the subcontractor performed under the contract, because the general contractors had not been paid by the project owner for that work.

Project owner PathNet, Inc. contracted with defendant Renegade to help construct portions of a fiber optic network located in New Mexico and Texas. Defendant MasTec subsequently purchased Renegade. On January 31, 2001, MasTec and Renegade hired MidAmerica as a subcontractor to install conduit for fiber optic line. The parties’ agreement was embodied in a written subcontract.

MidAmerica began performing under the Subcontract Agreement. MasTec and Renegade made an initial payment of approximately $127,000 to MidAmerica in March 2001 for work performed in January and February of that year. PathNet filed for bankruptcy in April 2001. Subsequently, MasTec and Renegade refused to make any further payments to MidAmerica, asserting that they had not yet received payment from PathNet for the work MidAmerica performed.

MidAmerica brought suit against MasTec and Renegade in the United States District Court for the Western District of Oklahoma, alleging that MasTec and Renegade owed it approximately $1.9 million for work performed under the Subcontract Agreement. The district court denied MidAmerica’s motion for partial summary judgment and granted MasTec and Renegade’s counter-motion for summary judgment on all of MidAmerica’s claims, holding that a “pay-if-paid” clause in the Subcontract Agreement providing that “all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the work by Contractor from Owner,” was “unambiguous and makes (MasTec and Renegade’s) receipt of payment for the work from PathNet a condition precedent to payment of MidAmerica.” MidAmerica appealed to the United States Court of Appeals for the 10th Circuit.

On appeal, the Court reviewed the types of language that constitute “pay-if-paid” and “pay-when-paid” clauses under both Texas and New Mexico law in a contract for a private-sector construction project. The clause in question in the Subcontract Agreement provided:

“Upon final acceptance of the Work by Contractor and Owner, Contractor will pay Subcontractor for the Work at the prices and schedule and in the manner described on the Work Order(s); provided that, all payments to Subcontractor by Contractor are expressly contingent upon and subject to receipt of payment for the Work by Contractor from Owner, even if (a) Contractor has posted a payment bond with Owner or (b) the Primary Contract is on a “cost plus” or other reimbursement basis requiring the Contractor to pay subcontractors prior to being reimbursed by Owner.”

The Court first reviewed the clause in question under Texas law and held that the clause properly constituted a “pay-if-paid” clause as a result of the “clear conditional language” in the Subcontract Agreement. The Court then reviewed the clause in question under New Mexico law and held that the clause, (1) through virtue of the parties’ clear intent to create a condition precedent, was not violative of New Mexico’s Retainage Act, N.M. Stat. Ann. §§ 57-28-1 – 57-28-11, and (2) through the “clear condition” contained in the Subcontract Agreement, constituted an enforceable “pay-if paid” clause under New Mexico law.

The Court also analyzed MidAmerica’s claim that the partial payment made by MasTec and Renegade to MidAmerica established that MidAmerica should have been paid regardless of whether MasTec and Renegade were paid by PathNet. Due to the lack of ambiguity in the Subcontract Agreement as to payment, the Court held that MidAmerica’s argument regarding partial payment failed under both Texas and New Mexico law.

As such, the Court held that that under either Texas or New Mexico law, or both, MasTec and Renegade were not obligated to pay MidAmerica for the work that MidAmerica performed under the Subcontract Agreement unless and until PathNet paid MasTec and Renegade for that work.

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