U.S. Court Of Appeals for the Fourth Circuit Holds Pay-When-Paid Clause Valid and Enforceable, Excusing General Contractor From Paying Subcontractor Until Payment Received From Owner

Universal Concrete Products Corp. v. Turner Construction Co.
595 F.3d 527 (4th Cir. Feb. 19, 2010)

Universal Concrete Products Corp. (“Universal”) sued Turner Construction Co. (“Turner”) for breach of contract and several other claims seeking payment for $885,507 worth of precast concrete work Universal had completed at the Granby Tower construction project in Norfolk, Virginia (“Project”).

Universal had entered into a written subcontract with Turner for the installation of precast concrete at the Project. Turner had a prime contract with the project owner’s to provide general construction work on the Project. The Project fell through in March 2008 when the owner could no longer finance it. By that point, however, Universal had already substantially completed all of its work at the Project. Turner, however, had not paid Universal for any of the work performed because Turner had not yet been paid by the owner. When Universal sought payment from Turner for the work performed, Turner refused citing a pay-when-paid provision in the subcontract.

Turner sought and was granted summary judgment in the District Court of the Eastern District of Virginia. The District Court found that the pay-when-paid clause was valid and barred Universal’s breach of contract claim against Turner. Universal appealed arguing that the pay-when-paid clause was ambiguous when read in light of the prime contract provisions, which were expressly incorporated into the subcontract.

On appeal, the Court of Appeals reviewed the decision de novo. The Court of Appeals found that under Virginia law (the law that applied to the subcontract), pay-when-paid clauses are valid when the contract includes “an express condition clearly showing that to be the intention of the parties.” Both Turner and Universal agreed that the pay-when-paid clause was facially unambiguous in the contract. Universal relied on language in the prime contract (a standard AIA A121 form), which provided that the costs for which the owner would reimburse Turner included “[p]ayments made by Construction Manager to Subcontractors in accordance with the requirements of the subcontracts,” to argue that Turner and the owner contemplated paying Universal before invoicing the owner. The Court of Appeals rejected this argument finding that the clause related only to the reimbursement amount, and not to when amounts would be paid, and that the clause did not render the pay-when-paid clause ambiguous. Further, the Court of Appeals agreed with the district court’s findings that the AIA A201 document contemplated that Turner could pay its subcontractors after first being paid by the owner: section 9.6.2 directs Turner to pay its subcontractors “upon receipt of payment from the Owner, out of the amount paid to the Contractor on account of each Subcontractor’s portion of the Work,” and section 9.3.1 requires Turner to submit “requisitions from Subcontractors” with its invoices. The Court of Appeals concluded that the prime contract provisions were not conflicting and could be read together with the language of the subcontract.

The Court of Appeals next considered Universal’s reliance on two cases, one from Florida and one from Missouri, which held that almost identical provisions in a subcontract and general contract were ambiguous enough not to enforce the underlying pay-when-paid provisions: OBS Co. v. Pace Constr. Corp., 558 So.2d 404 (Fla. 1990) and MECO Sys., Inc. v. Dancing Bear Entm’t, 42 S.W.3d 794 (Mo. Ct. App. 2001). While the Court of Appeals agreed that the precedents were not easily distinguishable, the Court rejected Universal’s reliance on these cases. The Court of Appeals found that the Virginia has a policy preference for “freedom to contract,” which was recognized by the Virginia Supreme Court in Galloway Corp. v. S.B. Ballard Constr. Co., 464 S.E.2d 349 (Va. 1995), an interest that directly conflicts with a paternalistic desire to protect one contracting party over the other. The Court also noted that a recent Virginia trial court, which was faced with almost identical facts and contractual language, also enforced the pay-when-paid clause: W.O. Grubb Steel Erection, Inc. v. 515 Granby, LLC, CL 08-3278 (Va. Cir. Ct. Oct. 16, 2009) (letter opinion). The Court noted that the Florida legislature recently passed a law making it easier for general contractors to enforce pay-when-paid clauses when payment bonds were at stake, undermining the earlier Florida court decision. The Court held that when the purpose of a state’s precedent was undermined by subsequent legislation and case law, it could not impute that purpose to another state whose cases and policy statements are directly contrary.

The Court of Appeals affirmed the District Court’s order granting summary judgment to Turner.

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