Opinion ID: 1846346
Heading Depth: 1
Heading Rank: 5

Heading: The Pay-When-Paid Clause: Condition Precedent or Timing Mechanism?

Text: Harbert and Federal also argue that, regardless of whether Kruger has fulfilled its obligations under the subcontract, the pay-when-paid clause contained in the Harbert-Kruger subcontract is a condition precedent to Harbert's payment of the retainage. Accordingly, Harbert contends that Kruger may not recover payment of the retainage under the payment bond until Harbert receives payment of the amount of the retainage from the Water Board, which, we note, may never occur. We agree, for several reasons, with the trial court's conclusion that the pay-when-paid clause did not create a condition precedent to payment but was rather merely a timing mechanism for the final payment under the subcontract. We find authority for this position in the language of the subcontract, in our caselaw, in the Restatement (Second) of Contracts, and in the holdings of numerous other jurisdictions. First, the payment clause in the subcontract clearly provides that [a] final payment... shall be made within thirty (30) days after the last of the following to occur.... (Emphasis added.) As the trial court noted, [t]he parties certainly intended that Kruger would receive payment. We agree. The language quoted above uses the mandatory shall in conjunction with the verb pay. A reasonable interpretation of this language is that it creates on the part of Harbert an absolute obligation to pay; the language that followswithin thirty (30) days after the last of the following to occur: (a) ..., (b)..., (c) ..., and (d) ...is reasonably read as merely specifying the time for payment, rather than as creating a condition precedent to payment. We find support for this interpretation in the similar case of Crass v. Scruggs, 115 Ala. 258, 22 So. 81 (1897). In Crass v. Scruggs , the general contractor, Crass, contracted to provide services to a railroad company. Crass then entered into a subcontract with Scruggs, pursuant to which Scruggs agreed to provide certain services to Crass. The subcontract between Crass and Scruggs contained the following provision: `Payments based on engineer's estimates, and to be made on the 15th of each month, or as soon thereafter as said R.R. Company pays or causes to be paid the said J.T. Crass.' 115 Ala. at 264, 22 So. at 82. Scruggs performed as required under the terms of its subcontract with Crass. After three years elapsed without payment from Crass, Scruggs sued, seeking to recover payment under the subcontract. Crass defended the claim for payment, contending that the pay-when-paid clause created a condition precedent to payment and that the condition had not been fulfilledi.e., the railroad company had not paid Crass. Therefore, Crass contended, it had no obligation to pay Scruggs. The trial court entered a judgment in favor of Scruggs and Crass appealed. The Alabama Supreme Court affirmed the judgment in favor of Scruggs, stating: [A]pplying the general rules of construction we have stated, we do not doubt that the provision of the contract merely prescribes a time of payment, and not a condition upon which payment was dependent. Can it be reasonably supposed it was contemplated that the plaintiffs would devote their time, labor, and means to the work they were bound to complete within a particular period, without an absolute engagement from the defendant to pay them? ... [Scruggs] had no contact with the railroad company; were unknown to it; and to them the company owed no duty. [Crass] had contractual relation with it, and from it expected to derive funds to meet his engagement to [Scruggs]; and it was time to realize these funds for which he was contracting, and not freedom from liability if they were not realized. Similar contracts have been the subject of frequent construction, and the construction deemed best to give effect to the intention of the parties has been that which avoids the conversion of an absolute into a conditional engagement, or which puts it into the power of a defendant at his mere option to pay or not to pay.... In McCarty v. Howell, 24 Ill. 341 [(1860)], a note payable four months after date, containing the clause, `or as soon as I shall be able to collect a certain note against Abram Davis,' was held to be due absolutely at four months, or sooner if the Davis note was collected. The court said, unless this was the construction, no meaning could be given to the promise of payment at `four months after date.' In Harlow v. Boswell, 15 Ill. 56 [ (1853) ], a note payable `twelve months after date,    or as soon as I can sell the above amount of Allen's Vegetable Tonic,' was deemed payable absolutely at twelve months.... In Nunez v. Dautel, [86 U.S. (19 Wall.) ] 560[, 22 L.Ed. 161] [ (1873) ], the action was upon an instrument acknowledging indebtedness for services rendered containing this clause: `This we will pay as soon as the crop can be sold, or the money raised from any other source, payable with interest.' The construction the instrument received was, that it was a promise to pay as soon as the crop was sold, or the money was received from any other source, or after the lapse of a reasonable time for the sale of the crop or the derivation of the money from other sources; that it was not intended if the crop was not raised, or was destroyed and never sold, or the money was not realized from other sources, that the debt should not be paid. `Such a result,' it was said, `would be a mockery of justice.' There are other authorities leading to the like conclusion, but we are content with a mere reference to them. Eaton v. Yarborough, 19 Ga. 82 [(1855)]; Lewis v. Tipton, 10 Ohio St. 88 [(1859)]; Crooker v. Holmes, 65 Me. 195 [(1875)]. It is insisted that the parties construed the promise of payment as conditionalthat [Crass] was not under liability to pay [Scruggs] until the railroad company paid him. The facts upon which it is supposed this construction may be imputed to [Scruggs] are, that they recognized [Crass] as having a contract with the railroad companythat the estimates of the work were made by the engineer of the company; and that before the commencement of this suit, near three years after the completion of the work, they made out no account against [Crass], making demand of its payment. This is a slender foundation on which to impute to [Scruggs] concurrence in a construction of the contract, converting the engagement of [Crass] into a conditional promise, dependent on the action of the railroad company, over which [Scruggs] could have no control. Crass v. Scruggs, 115 Ala. at 265-68, 22 So. at 82-83. We agree with the reasoning of the Crass Court, and that reasoning is applicable in this case. Can it be reasonably supposed, without express evidence in support thereof, that Harbert and Kruger entered into an agreement pursuant to which Kruger was expected to perform a significant amount of work and to provide a substantial amount of materials under the terms of the subcontract, without an absolute agreement from Harbert to pay Kruger for its services and materials? We think not, and nothing in the record indicates that Kruger agreed to assume the risk of nonpayment by the Water Board for events completely outside its control or influence. We find further support for our reading of the Harbert-Kruger pay-when-paid clause in Restatement (Second) Contracts § 227 (1981), which provides, in pertinent part: (1) In resolving doubts as to whether an event is made a condition of an obligor's duty, and as to the nature of such an event, an interpretation is preferred that will reduce the obligee's risk of forfeiture, unless the event is within the obligee's control or the circumstances indicate that he has assumed the risk. Comment b. to § 227 addresses the forfeiture of compensation that results when an event is made a condition precedent to an obligor's duty. Under § 227, the preferred interpretation for the pay-when-paid clause contained in the Harbert-Kruger subcontract is one that minimizes the risk of forfeiture to Kruger, unless the circumstances indicate that Kruger assumed the risk of nonpayment. As stated above, nothing in the record indicates that Kruger assumed such a risk. Harbert relies heavily on the case of James E. Watts & Sons Contractors, Inc. v. Nabors, 484 So.2d 373 (Ala.1985), as authority for its position; however, this reliance is misplaced. Watts is factually distinct from this case. In Watts, the contract in question was an oral one, and Nabors, the subcontractor, testified that he knew he would not be paid until Watts & Sons, the contractor, received payment from the City of Rainsville. Thus, in Watts, the circumstances clearly indicated that the subcontractor assumed the risk of nonpayment. We have no such admission in this case; we find nothing in the record indicating that Kruger assumed the risk of nonpayment; and we are presented with a written contract rather than an oral one. Accordingly, the Watts case is not dispositive of whether the pay-when-paid language contained in the Harbert-Kruger subcontract was intended to create a condition precedent to payment. [2] Further, we note that the majority of other jurisdictions construe pay-when-paid clauses in a similar manneri.e., the majority of jurisdictions construe such a provision as allowing payment under the contract to be delayed but not stopped altogether. See, e.g., Thos. J. Dyer Co. v. Bishop Int'l Eng'g Co., 303 F.2d 655 (6th Cir.1962); Dancy v. William J. Howard, Inc., 297 F.2d 686 (7th Cir.1961); Statesville Roofing & Heating Co. v. Duncan, 702 F.Supp. 118 (W.D.N.C.1988); Robinson & Son, Inc. v. Ground Improvement Techniques, 31 F.Supp.2d 881 (D.Col. 1998); Brown & Kerr Inc. v. St. Paul Fire & Marine Ins. Co., 940 F.Supp. 1245 (N.D.Ill.1996); Southern States Masonry, Inc. v. J.A. Jones Constr. Co., 507 So.2d 198 (La.1987); Koch v. Construction Tech., Inc., 924 S.W.2d 68 (Tenn. 1996); and Byler v. Great Am. Ins. Co., 395 F.2d 273, 277 (10th Cir.1968). These courts reached results nearly identical to the result reached by the Crass Court, applying almost identical reasoning, further strengthening our belief in the correctness of Crass, the proper application of Restatement (Second) Contracts § 227, and our reading of the Harbert-Kruger subcontract. For example, in Koch v. Construction Technology, Inc., the Tennessee Supreme Court held that the following payment clause did not create a condition precedent to the general contractor's obligation to pay the subcontractor: `Partial payments subject to all applicable provisions of the Contract shall be made when and as payments are received by the Contractor. The Subcontractor may be required as a condition precedent to any payment to furnish evidence satisfactory to the Contractor that all payrolls, material bills, and other indebtedness applicable to the work have been paid.' 924 S.W.2d at 69. The Koch Court interpreted this provision to create a timing mechanism for payment rather than a condition precedent to payment, stating: First, it is well-established that condition precedents are not favored in contract law, and will not be upheld unless there is clear language to support them. Furthermore, this general rule applies with particular force in the context of `pay when paid' clauses, for the plaintiff is correct that an overwhelming majority of jurisdictions do not construe such clauses so as to release the general contractor from all obligation to make payment to the subcontractor in case of nonperformance by the owner. Rather, these clauses are most often construed as simply affecting the timing of payments that the general contractor is required to make to the subcontractor, regardless of whether the owner performs or not. These courts refuse to shift the risk of the owner's nonperformance from the general contractor to the subcontractor unless the language clearly indicates that the parties intended to do so. 924 S.W.2d at 71 (citations and footnotes omitted). For these reasons, we agree with the trial court that the pay-when-paid clause in the Harbert-Kruger subcontract did not create a condition precedent to payment, but that it was merely a timing mechanism for payment. Because Kruger has satisfactorily performed under the subcontract and a reasonable time has passed without payment, Kruger is entitled to payment from Harbert. Accordingly, the pay-when-paid clause does not bar Kruger from recovering under the payment bond.