Federal Court in Pennsylvania Holds Pay-If-Paid Clause Unenforceable Where Prime Contractor’s Inadvertent Delays Contribute to the Owner’s Withholding of Payment

Connelly Constr. Corp. v. Travelers Cas. & Surety Co. of Am., 2018 U.S. Dist. LEXIS 123009 (E.D. Pa. July 24, 2018).

This post was published in the October 4, 2018 issue of eNews published by National Association of Credit Management (NACM).

The Commonwealth of Pennsylvania Department of General Services undertook a project for the construction of a new maximum security prison facility in Montgomery County, Pennsylvania.  Walsh Heery Joint Venture (“WHJV”) was the prime contractor and it retained Connelly Construction Corporation as its masonry subcontractor.

The prime contract permitted the Commonwealth to withhold retainage from WHJV until completion of the project.  Similarly, the subcontract permitted WHJV to withhold retainage from Connelly in proportion to the retainage held by the Commonwealth.  The subcontract also included a pay-if-paid clause under which Connelly agreed that it was not entitled to payment unless, as an express condition precedent, WHJV was paid by the Commonwealth.

Completion of the project was delayed for more than two years.  As a result, the Commonwealth continued to withhold retainage from WHJV, and WHJV thus withheld more than $200,000 in retainage from Connelly, long after Connelly completed its scope of work.

Connelly disputed WHJV’s continued withholding of payment and commenced litigation in the Federal District Court for the Eastern District of Pennsylvania.  WHJV moved for summary judgment on Connelly’s claim for retainage.  Citing the subcontract’s pay-if-paid clause, WHJV argued that it had no duty to pay Connelly until it was paid its retainage by the Commonwealth.  Connelly opposed the motion, arguing that WHJV’s own failures to prosecute the work contributed to the project’s delays. Thus, it argued that a common law doctrine known as the “prevention doctrine” barred WHJV from relying on the pay-if-paid clause  The District Court agreed with Connelly and denied WHJV’s motion.

In deciding the motion, the District Court recognized that pay-if-paid clauses are valid and enforceable under Pennsylvania law.  However, that principle did not end the Court’s inquiry.  Instead, the issue before the Court was whether the prevention doctrine prevented WHJV from relying on the pay-if-paid clause to justify its withholding of payment under the circumstances.  The Court cited to the Supreme Court of Pennsylvania’s decision in Howley v. Scranton Life Ins. Co., 257 Pa. 243 (1947) to summarize the prevention doctrine as follows: “if a promisor is himself the cause of the failure of performance… of a condition upon which his own liability depends, he cannot take advantage of the failure.”  The Court then undertook to decide whether the doctrine applied to prevent WHJV from relying on the pay-if-paid clause.

WHJV argued that the prevention doctrine is triggered only where a party’s failure to trigger a condition precedent is deliberate, while its own delays to the project were merely  inadvertent. By contrast, Connelly argued that the prevention doctrine applies regardless of whether the conduct is deliberate or inadvertent.  The Court agreed with Connelly, concluding that “inadvertently preventing the satisfaction of the condition precedent, when that condition persists over time as it has here, is enough to trigger the prevention doctrine.”

The Court therefore held that the prevention doctrine barred WHJV from relying on the pay-if-paid clause.  Citing two letters issued by the Commonwealth expressing “serious concerns” regarding WHJV’s delays and deficient work, the Court reasoned that a factfinder could conclude that WHJV contributed to delays and, therefore, to its own non-payment.  While there was no evidence that these delays were deliberate, WHJV’s inadvertent delays were enough to trigger the prevention doctrine because, as prime contractor, it had “complete control” over the work. To hold otherwise, the Court concluded, would render Connelly “a hostage to WHJV’s sloth.”   Accordingly, WHJV was barred by the prevention doctrine from relying on the pay-if-paid clause because, whether or not its delays were deliberate or inadvertent, it “has still prevented a condition precedent to its duty to pay Connelly the retainage.”

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Kristopher Berr

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