Present: All the Justices 

GALLOWAY CORPORATION 

v. Record No. 942077 

S.B. BALLARD CONSTRUCTION CO., ET AL. 

OPINION BY JUSTICE LAWRENCE L. KOONTZ, JR. 

 November 3, 1995 

GALLOWAY CORPORATION 

v. Record No. 950529 

CAPE HENRY MECHANICAL, INC., ET AL. 

FROM THE CIRCUIT COURT OF THE CITY OF NORFOLK 

John E. Clarkson, Judge 

 This appeal arises from a contract dispute between a general 

contractor and several of its subcontractors on a construction 

project following the project owner's default in making payment 

on its contract with the general contractor. The issue we 

consider is whether the terms of the subcontracts provide the 

general contractor an absolute "pay when paid" defense to its 

subcontractors' breach of contract claims based upon the owner's 

failure to pay. Stated differently, the issue we consider is 

whether the terms of the subcontracts in question shift the risk 

of the owner's default on payment for labor and materials from 

the general contractor to the subcontractors. 

 I. 

 BACKGROUND 

 On August 17, 1988, Galloway Corporation (Galloway), a 

construction contractor, entered into a contract with Rowe 

Properties - Bank Street Limited Partnership (Rowe) for the 

construction of the First American Financial Center, a fourteenstory commercial office complex in downtown Norfolk. Rowe and 
Galloway used a standard, pre-printed American Institute of 

Architects (AIA) contract with attachments to form the basis of 

their agreement. The stated contract price was $10,960,000. 

Within the general conditions of the contract was the following 

requirement: 

 The Contractor shall promptly pay each Subcontractor, 

upon receipt of payment from the Owner, out of the 

amount paid to the Contractor on account of such 

Subcontractor's Work, the amount to which said 

Subcontractor is entitled . . . . 

 Galloway immediately commenced work on the construction 

project and let subcontracts to numerous suppliers of labor and 

materials. Galloway also used a standard, pre-printed AIA form 

in letting these subcontracts. Separate paragraphs of the 

subcontract form specify the manner in which progress payments 

and final payment will be made by Galloway to the subcontractor. 

 Paragraph 11.3 contains the following pertinent language: 

 The Contractor shall pay the Subcontractor each 

progress payment within three working days after the 

Contractor receives payment from the Owner. If the 

Architect does not issue a Certificate of Payment or 

the Contractor does not receive payment for any cause 

which is not the fault of the Subcontractor, the 

Contractor shall pay the Subcontractor, on demand, a 

progress payment computed as provided in Paragraphs 

11.7 and 11.8. 

(Emphasis added.) In each contract, Galloway struck out all the 

language following the word "Owner", initialed the change and 

requested that the subcontractor initial the change. 

 Paragraph 12.1, entitled "Final Payment," contains the 

following pertinent language: 

 Final payment, constituting the entire unpaid 

balance of the Subcontract Sum, shall be made by the 

Contractor to the Subcontractor when the 

Subcontractor's Work is fully performed in accordance 
with the requirements of the Contract Documents, the 

Architect has issued a Certificate of Payment covering 

the Subcontractor's completed Work and the Contractor 

has received payment from the Owner. If, for any cause 

which is not the fault of the Subcontractor, a 

Certificate for Payment is not issued or the Contractor 

does not receive timely payment or does not pay the 

subcontractor within three working days after receipt 

of payment from the Owner, final payment to the 

Subcontractor shall be made upon demand. 

(Emphasis added.*) Again, in each contract, Galloway struck out 

all the language following the word "Owner", initialed the change 

and requested that the subcontractor initial the change. 

 Work on the project continued from August 1988 until May 

1990 when Rowe, suffering severe financial difficulties, stopped 

making progress payments to Galloway. On May 31, 1990, Galloway 

informed Rowe and the architect that it would stop work on the 

project and notified its subcontractors to secure their tools, 

equipment, and materials on the job site in anticipation of work 

being stopped. Work actually continued until July 17, 1990, when 

Galloway terminated its contract with Rowe. At that time Rowe 

had failed to make three progress payments to Galloway totaling 

slightly less that $3,000,000. 

 On September 20, 1990, Galloway filed a bill of complaint 

against Rowe to enforce its mechanic's liens. S.B. Ballard 

Construction Company (Ballard), Sprinkle Masonry, Inc. 

(Sprinkle), Empire Granite Corporation (Empire), Cape Henry 

Mechanical Corporation (Cape Henry), and Dover Elevator Company 

 

 *The phrase "after the Contractor receives payment from the 

Owner" in paragraph 11.3, supra, and the phrase "and the 

Contractor has received payment from the Owner" in paragraph 12.1 

form the basis of Galloway's "pay when paid" defense discussed 

later in this opinion. 
(Dover), subcontractors on the project, filed individual bills or 

cross-bills against Rowe and Galloway for their mechanic's liens 

and sought damages from Galloway for breach of contract. The 

trial court consolidated all these claims into the suit filed by 

Galloway against Rowe. 

 In a January 13, 1992 pre-trial order, the parties outlined 

the issues and stipulated to various elements of the evidence. 

Galloway asserted that the modification of the AIA contract form 

used in the subcontracts provided it with a "pay when paid" 

defense. That is, that the phrases "after the Contractor 

receives payment from the Owner" and "has received payment from 

the Owner," in paragraphs 11.3 and 12.1, respectively, create a 

condition precedent that Galloway must first receive payment from 

Rowe before being required to make payment under the 

subcontracts. Some, though not all, of the subcontractors agreed 

that if their contracts provided Galloway with a "pay when paid" 

defense, their sole course of recovery was against Rowe through 

their mechanic's liens. Also within the stipulations were 

agreements between Galloway and the various subcontractors that 

parol and other extrinsic evidence could be produced on the "pay 

when paid" issue. 

 Testimony was received over six weeks. Following the 

conclusion of the evidence and argument of counsel, the trial 

court determined the validity, priority, and amount of the 

mechanic's liens plus interest and approved the sale of the 

property, deferring the satisfaction of the mechanic's liens 

until after the completion of the sale. The trial court delayed 
further proceedings on the breach of contract claims until after 

the conclusion of the sale. 

 Following the sale and division of the proceeds, the 

subcontractors, whose liens had precedence over Galloway's, 

sought to recover the remaining unpaid balances due under their 

contracts with Galloway. On January 21, 1994, the trial court, 

by letter to counsel, stated its finding that there remained 

unpaid balances on the contracts and that Galloway did not have 

an absolute "pay when paid" defense based on the contracts as 

written. Rather, the trial court found that the phrases "after 

the Contractor receives payment from the Owner" and "has received 

payment from the Owner" only permitted Galloway to "delay 

payment[,] but the contract[s] cannot be construed to say that 

each sub[contractor] must bear its own loss if Galloway never got 

paid [on its contract with the owner]." 

 Galloway filed a motion for reconsideration, which was 

denied. Thereafter, the trial court entered final orders 

directing judgment for the subcontractors and awarding them the 

balance of their unpaid contracts plus interest. We awarded 

Galloway an appeal to consider the question of the "pay when 

paid" defense. 

 II. 

THE "PAY WHEN PAID" DEFENSE 

 This appeal presents our first opportunity to consider the 

use of "pay when paid" (sometimes rendered as "paid when paid") 

clauses in construction contracts. The use of such clauses rose 

significantly in the 1980s because economic conditions made 
successful completion of private construction projects more 

difficult and engendered a cautious attitude throughout the 

construction industry. See generally, Francis J. Mootz, III, The 

Enforceability of Paid When Paid Clauses in Construction 

Contracts, 64 Conn. B.J. 257 (1990). 

 The leading case to address the enforceability of "pay when 

paid" clauses is Thos. J. Dyer Co. v. Bishop International 

Engineering Co., 303 F.2d 655 (6th Cir. 1962). In Dyer, the 

contract provided that "no part of [the price to be paid to the 

subcontractor] shall be due until five (5) days after Owner shall 

have paid Contractor therefor." Id. at 656. Following the 

insolvency of the owner, a subcontractor sought to enforce its 

contract with the general contractor. The Sixth Circuit rejected 

the general contractor's argument that the language of the 

contract constituted a condition precedent giving it a defense to 

the breach of contract claim. The court explained its rationale 

in the following language: 

 In the case before us we see no reason why the usual 

credit risk of the owner's insolvency assumed by the 

general contractor should be transferred from the 

general contractor to the subcontractor. It seems 

clear to us under the facts of this case that it was 

the intention of the parties that the subcontractor 

would be paid by the general contractor for the labor 

and materials put into the project. We believe that to 

be the normal construction of the relationship between 

the parties. If such was not the intention of the 

parties it could have been so expressed in unequivocal 

terms dealing with the possible insolvency of the 

owner. North American Graphite Corp. v. Allan, 87 U.S. 

App. D.C. 154, 184 F.2d 387, 390. Paragraph 3 of the 

subcontract does not refer to the possible insolvency 

of the owner. On the other hand, it deals with the 

amount, time, and method of payment, which are 

essential provisions in every construction contract, 

without regard to possible insolvency. In our opinion, 

paragraph 3 of the subcontract is a reasonable 
provision designed to postpone payment for a reasonable 

period of time after the work was completed, during 

which the general contractor would be afforded the 

opportunity of procuring from the owner the funds 

necessary to pay the subcontractor. Stewart v. Herron, 77 Ohio St. 130, [146,] 82 N.E. 956 [,959]. To 

construe it as requiring the subcontractor to wait to 

be paid for an indefinite period of time until the 

general contractor has been paid by the owner, which 

may never occur, is to give to it an unreasonable 

construction which the parties did not intend at the 

time the subcontract was entered into. 

Id. at 661. 

 The contract in Dyer further provided that 90 percent of the 

payment was due in any case 35 days after completion of the work. 

Id. at 656. The court construed this provision of the contract 

together with the term relied on by the general contractor as 

merely postponing the time of payment to the subcontractor on an 

unconditional promise to pay until payment by the owner, "or for 

a reasonable period of time if it develops that such event does 

not take place." Id. at 659. The court premised its result on 

the fact that it is the general contractor who contracts with the 

owner. Id. at 660. The court further held that the credit risk 

inherent in the general contractor's undertaking may be shifted 

to the subcontractor, but in order to do so, "the contract 

between the general contractor and subcontractor should contain 

an express condition clearly showing that to be the intention of 

the parties." Id. at 661 

 Since the Dyer decision, the majority of jurisdictions which 

have considered the "pay when paid" defense have adopted the 

reasoning of the Sixth Circuit. See Mootz, Enforceability, 64 

Conn. B.J. at 263 and cases cited therein at n.17; see also
Gilbane Building Co. v. Brisk Waterproofing Co., Inc., 585 A.2d 

248, 250 (Md. Ct. Spec. App. 1991) (holding that use of term 

"condition precedent" in "pay when paid" clause clearly 

establishes intent of parties to shift credit risk of owner's 

insolvency to subcontractor). A minority of jurisdictions as a 

matter of policy do not allow the risk of owner insolvency to be 

shifted from the general contractor to the subcontractors. See, 

e.g., N.C. Gen. Stat. § 22C-2 (1994). 

 We find the reasoning of the Dyer decision to be sound and 

in concert with traditional notions of the freedom to contract. 

See Worrie v. Boze, 191 Va. 916, 928, 62 S.E.2d 876, 882 (1951). 

 However, that reasoning is applicable only where the language of 

the contract in question is clear on its face. If, as in Dyer, a 

contract on its face reasonably contemplates eventual payment by 

the general contractor to the subcontractor, or, as in Gilbane, 

the parties clearly intend there to be a condition precedent 

fulfilled before payment comes due, the contract will be 

construed as written and will not be reformed by the court 

through the introduction of parol and other extrinsic evidence of 

a contrary intent. Accordingly, we must consider whether the 

contracts sub judice are clear on their face as to the parties' 

intent. 

 III. 

CONSTRUCTION OF THE CONTRACTS 

 Although the parties stipulated that parol and other 

extrinsic evidence could be adduced as to the meaning of the 

disputed parts of the contracts, neither the trial court, nor 
this Court, is thereby precluded from examining the contracts 

first, following the usual rules of contract construction. See

Whitt v. Godwin, 205 Va. 797, 802, 139 S.E.2d 841, 845 (1965). 

The mere fact that terms of a contract are in dispute is not 

evidence that the language is not clear and explicit and requires 

extrinsic evidence to aid in its construction. If the terms of 

the parties' agreement are contained in a clear and explicit 

writing, that writing is the sole memorial of the contract and 

the sole evidence of the agreement. In that event, parol 

evidence cannot be used to explain the written contractual terms. 

See Amos v. Coffey, 228 Va. 88, 91-92, 320 S.E.2d 335, 337 

(1984). 

 Similarly, "parol evidence cannot be considered to explain a 

patent ambiguity, that is, to supply the understanding that the 

parties could have reasonably been expected to reach where the 

language of an instrument reflects no understanding." Zehler v. 

E.L. Bruce Co., Inc., 208 Va. 796, 799, 160 S.E.2d 786, 789 

(1968); see also City of Roanoke v. Blair, 107 Va. 639, 641, 60 

S.E. 75, 76 (1908). Only where the ambiguity is not self-evident 

from the writing, that is, where there is a "latent ambiguity," 

is the use of parol and other extrinsic evidence permissible to 

aid the trier of fact in determining the intention of the 

parties. Portsmouth Gas Co. v. Shebar, 209 Va. 250, 253, 163 

S.E.2d 205, 208 (1968). 

 "An ambiguity exists when language is of doubtful import, 

admits of being understood in more than one way, admits of two or 

more meanings, or refers to two or more things at the same time." 
Allen v. Green, 229 Va. 588, 592, 331 S.E.2d 472, 475 (1985); 

see also Renner Plumbing, Heating & Air Conditioning, Inc. v. 

Renner, 225 Va. 508, 515, 303 S.E.2d 894, 898 (1983). Ambiguity 

is created by the "[d]oubtfulness [or] doubleness of meaning 

. . . of an expression used in a written instrument." Berry v. 

Klinger, 225 Va. 201, 207, 300 S.E.2d 792, 796 (1983). 

 Here, as in Dyer, the terms in paragraphs 11.3 and 12.1, 

respectively, deal with the amount, time, and method of payment 

to the subcontractor by the contractor, without regard to 

possible insolvency of the owner. As such, they are essential 

provisions in any construction subcontract. Unlike the facts in 

Dyer, however, there is no additional language here which would 

permit us to find that the parties contemplated payment "within a 

reasonable time." Likewise, nothing in the contracts would 

permit us to find, as in Gilbane, that the parties clearly 

understood these terms to assert a condition precedent on 

payment. Moreover, the contracts are completely devoid of any 

unequivocal terms dealing with the possible insolvency of Rowe to 

show that the subcontractors assumed the risk of that insolvency. 

 Thus, the language of the contracts is not patently ambiguous; 

the latent ambiguity in the contracts was exposed only after the 

default of the owner brought the issue into focus. 

 Thus, we conclude that the phrases "after the Contractor 

receives payment from the Owner" and "has received payment from 

the Owner" constitute latent ambiguities in the contracts. That 

is, the phrases, while appearing perfectly clear at the time the 

contracts were formed, because of subsequently discovered or 
developed facts, may reasonably be interpreted in either of two 

ways. See Zehler, 208 Va. at 799 n.5, 160 S.E.2d at 789 n.5. 

Here, the contracts in question could be interpreted to require 

Galloway to pay a subcontractor only if it received a payment 

demanded from Rowe identifiable with the progress or completion 

of a subcontract, or merely to provide for a reasonable time to 

pay after such demand was made to Rowe. Because this ambiguity 

was not patently evident on the face of the contract, the trial 

court was permitted to look beyond the contract and determine the 

intent of the parties using parol and other extrinsic evidence. 

 IV. 

CONSIDERATION OF INDIVIDUAL CONTRACTS 

 When resolving a dispute between the parties to a contract 

with a latent ambiguity, the court may first consider, among 

other things, whether negotiations and prior dealings of the 

parties manifested their intent with respect to the ambiguous 

term. If the parties both manifested the same intent with 

respect to the ambiguity, that intent will be enforced. If, on 

the other hand, the parties do not manifest the same intent 

regarding the ambiguity, there has been no meeting of the minds 

on that term of the contract, and the intent of one party will 

not control. It is apparent from the record of this case that 

Galloway intended, in each case, that the contract would provide 

it with an absolute "pay when paid" defense. Thus, only if the 

subcontractor to each contract manifested the same intent will an 

absolute "pay when paid" defense be available to Galloway. 

Ballard Construction
 Ballard's president, Steven B. Ballard, testified that he 

had previous experience with "pay when paid" clauses and that he 

had "been educated the hard way" as to their effect. He further 

testified that he was aware that Galloway had altered the AIA 

form contract, but that he was depending on a separate "scope of 

work" agreement, that pre-dated the contract, which included a 

discount "to expedite the payment from the contractor to 

[Ballard] without worrying about the payment from the owner to 

the contractor." Under that agreement, before and after signing 

the contract, Ballard received twelve progress payments from 

Galloway without Galloway first receiving a payment from Rowe 

identifiable to the work performed by Ballard. Based upon this 

evidence, the trial court properly construed the contract to 

permit Galloway only a reasonable amount of time in which to make 

progress and final payments to Ballard. Accordingly, we will 

affirm the trial court's award to Ballard. 

Dover Elevator

 After receiving the contract as modified by Galloway, Dover 

submitted an amendment which modified Article 12 to require 

"final" payment within 30 days of certain conditions being 

fulfilled by Dover. Dover was to receive payment if Rowe 

accepted the installation of the elevator cabs provided by Dover 

or if Rowe accepted the completion of the project in whole 

including acceptance of the elevator installation. Paul A. 

Galloway, Galloway's president, testified that neither of these 

conditions had occurred prior to Rowe's default. He further 

testified that he understood this to be a modification of the 
"pay when paid" clauses to eliminate the defense only in the 

event of one of the two conditions occurring. Although Dover 

presented evidence from its local manager, the manager conceded 

that he had no knowledge of the negotiations between Dover and 

Galloway. 

 Because Dover was in the position of having made the final 

offer, and thus technically having control over the drafting of 

the contract, we are required to construe the contract in favor 

of Galloway. See Baird v. Dodson Bros. Exterminating, 217 Va. 

745, 749, 232 S.E.2d 770, 773 (1977); Graham v. Commonwealth, 206 

Va. 431, 434-35, 143 S.E.2d 831, 834 (1965). Moreover, Dover's 

modification of Article 12 would indicate an understanding of the 

effect of Galloway's prior modification of paragraph 12.1, and, 

by extension, the identical modification of paragraph 11.3. 

Accordingly, we hold that the evidence adequately supports 

Galloway's contention that the parties had the intent of 

providing a "pay when paid" defense in circumstances other than 

those covered by the amendment to Article 12. The trial court's 

award to Dover for breach of contract was thus in error and will 

be reversed. 

Cape Henry Mechanical, Empire Granite, and Sprinkle Masonry

 William A. Etheridge, Jr., Cape Henry's president, testified 

that he understood that Galloway's intent in altering the AIA 

contract was "to not be obligated to pay [Cape Henry] until

[Galloway] got paid." (Emphasis added.) Etheridge further 

conceded that subcontractors did not favor such terms, but that 

he understood that he had to accept "pay when paid" terms in 
order to be awarded the subcontract. 

 Apparently through an oversight, Stephen C. Broocks, 

Empire's president, failed to sign the final contract proposed by 

Galloway. As Empire undertook to perform the contract according 

to its terms, an acceptance by performance resulted. The absence 

of an authorized signature does not defeat the existence of the 

contract and does not impact our analysis of the parties' 

awareness of and intention concerning the ambiguity. 

 Broocks testified that he "thought the language . . . as 

drafted . . . [meant that] if something should go wrong with the 

job it would make it hard to get my money." He further testified 

that he understood "Empire [would not] get paid until Galloway 

[was] paid." (Emphasis added.) 

 Robert Hedrick, Sprinkle's vice-president, testified that 

his "understanding of this contract . . . is that when [Galloway] 

received payment from the owner [Sprinkle] would receive [payment 

from Galloway]." He further testified that being familiar with 

Galloway and its relationship with Rowe, Sprinkle assented to 

these terms without concern that Rowe would not be able to 

fulfill its contract with Galloway. 

 The testimony of the representatives of these subcontractors 

shows that, even though the terms of their contracts were legally 

ambiguous, each had a mutuality of understanding with Galloway in 

regard to the ambiguous terms. A plaintiff's case can rise no 

higher than his own testimony. Massie v. Firmstone, 134 Va. 450, 

462, 114 S.E. 652, 655-56 (1922). Accordingly, since the 

evidence shows that the parties, by their negotiations and prior 
dealings, understood and intended their contracts to give 

Galloway an absolute "pay when paid" defense, the trial court's 

awards for breach of contract to these subcontractors were in 

error and will be reversed. 

 In summary, we hold that in the absence of a clear and 

unambiguous statement of the parties' intent as to the meaning of 

the time of payment provision in a construction subcontract, an 

absolute "pay when paid" defense is available to a general 

contractor only if it can establish by parol evidence that the 

parties mutually intended the contract to create such a defense. 

 Here, the evidence shows that such a defense was contemplated by 

each of the subcontractors and was agreed to by each 

subcontractor with the exception of Ballard. With respect to 

Ballard, the evidence shows express efforts to avoid such a 

defense. Accordingly, we will affirm the award to Ballard for 

breach of contract and will reverse the awards to Dover Elevator, 

Cape Henry Mechanical, Empire Granite, and Sprinkle Masonry. 

 Record No. 942077 - Affirmed in part,

 reversed in part,

and final judgment.

Record No. 950529 - Reversed and final judgment.