Opinion ID: 2436021
Heading Depth: 3
Heading Rank: 1

Heading: Construction of the Payment Clause

Text: The first issue for our determination is whether the payment clause in the subcontract establishes MHA's payment to CTI as a condition precedent to CTI's obligation to pay Koch. Koch argues that the lower courts erred in so construing the clause. Although conceding that the Hussey court construed similar language as a conditional promise, he argues that an overwhelming majority of jurisdictions reject that position, and instead hold that such language establishes an absolute promise to pay on the part of the general contractor, but simply affords it a reasonable amount of time to make the payments. This majority position is sound public policy, Koch contends, because it is inequitable to make the subcontractor's right to payment dependent upon the owner's performance, which might not be forthcoming for any number of reasons out of the subcontractor's control. Because Hussey is at odds with the compelling majority position, Koch concludes, it should be overruled and the majority rule adopted in its place. CTI responds that the law of other jurisdictions is of no consequence, and that Hussey  the only reported Tennessee decision addressing the issue  controls this case. Therefore, it concludes, the lower courts' construction of the payment clause should be affirmed. Because the parties and the lower courts relied so heavily upon Hussey , we must first examine it in some detail. In that case, the general contractor, Crass, agreed with the owner to build a section of railroad; and Crass subcontracted the trestle work to Hussey. The subcontract provided that Hussey was to take out estimates on or about the 1st of each month, and that  90 per cent of said estimate was to be paid about the 15th of the following month, or as soon thereafter as the railroad company should pay or cause to be paid J.T. Crass therefor ... Hussey, 53 S.W. at 986 (emphasis added). While the work was in progress, the railroad company became insolvent. Because of that development, Crass was only able to obtain 10% of the money due under his contract, despite extensive negotiating with the railroad company during its impending failure; and he paid his subcontractors on that pro rata basis. Hussey then brought an action against Crass for breach of contract. The general contractor defended by asserting that the pay when paid clause was a condition precedent and that, furthermore, Hussey had agreed during the negotiations with the railroad that his claim was dependent upon Crass's obtaining a settlement with that entity. The chancellor ruled in Crass's favor, and Hussey appealed. On appeal, the Chancery Court of Appeals affirmed the ruling. After setting forth the factual background, the court stated: We think there can be no doubt that the understanding between the parties was that the money that Mr. Crass expected to pay to his subcontractors was to be realized from the railroad company, and that he would not be liable to the subcontractors, and complainant among the number, unless he could make collection from the railroad company. We think this is the true construction of the contract itself on its face, so far as concerns complainant's claim. Hussey, 53 S.W. at 988. After making that statement, the Court proceeded to quote extensively from correspondence between the parties during Crass's negotiations with the railroad: this lengthy recitation was undertaken for the purpose of illustrating Hussey's willingness to accept whatever settlement Crass could negotiate with the financially declining railroad. The Court concluded by stating: From this correspondence, taken in connection with the statement in the contract that the complainant was to be paid when Crass was paid by the railroad company, we have no doubt that the expectation of both parties was that the liability of Mr. Crass depended upon his receiving money from the railroad company. The correspondence above mentioned is unintelligible otherwise. Id. at 988-89. We believe that the parties attach too much importance to Hussey for purposes of this case. While the Court did state in a single sentence that the language in the contract was a condition precedent to the subcontractor's right to payment, that conclusory statement was supported by no analysis. Indeed, the court spent almost no time on the contractual language, but was primarily concerned with the overwhelming evidence that tended to show that Hussy had agreed, after the railroad company began to show signs of financial collapse, to accept whatever payment Crass could obtain from it. Because of the Court's almost complete reliance on parol evidence, and because of the manifest lack of such evidence here, we cannot agree that Hussey requires that the contractual language at issue here be construed as a condition precedent. Having concluded that Hussey is not determinative, we must now decide the proper construction of that language. Although we have never specifically addressed the issue, there are a number of settled propositions of law to guide us. 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. Harlan v. Hardaway, 796 S.W.2d 953, 958 (Tenn. App. 1990). 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. [1] A good example of this reasoning is contained in the seminal case of Thos. J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6th Cir.1962), wherein the Court was called upon to construe a clause which provided that no part of [the subcontract price] shall be due until five days after Owner shall have paid Contractor therefor ... Dyer, 303 F.2d at 656. In holding that the clause was not a condition precedent, the Dyer court explained: It is, of course, basic in the construction business for the general contractor on a construction project of any magnitude to expect to be paid in full by the owner for the labor and material he puts into the project. He would not remain in business for long unless such was his intention and such intention was accomplished. That is a fundamental concept of doing business with another. The solvency of the owner is a credit risk necessarily incurred by the general contractor, but various legal and contractual provisions, such as mechanic's liens and installment payments, are used to reduce this to a minimum. These evidence the intention of the parties that the contractor be paid even though the owner may ultimately become insolvent. This expectation and intention of being paid is even more pronounced in the case of a subcontractor whose contract is with the general contractor, not with the owner. In addition to his mechanic's lien, he is primarily interested in the solvency of the general contractor with whom he has contracted. He looks to him for payment. Normally and legally, the insolvency of the owner will not defeat the claim of the subcontractor against the general contractor. Accordingly, in order to transfer this normal credit risk incurred by the general contractor from the general contractor to the subcontractor, the contract between the general contractor and the subcontractor should contain an express condition clearly showing that to be the intention of the parties. 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 relationship between the parties. If such was not the intention of the parties it could have been expressed in unequivocal terms dealing with the possible insolvency of the owner ... Dyer, 303 F.2d at 660-61 (citations omitted). [2] With these rules in mind, we conclude that the language here does not evidence the parties' intention to shift the risk of the owner's nonperformance from the general contractor to the subcontractor with sufficient clarity to qualify as a condition precedent. The first sentence  payments ... shall be made when and as they are received by the contractor  could be interpreted as a timing provision; it is not necessarily indicative of the parties' intent to make CTI's obligation to pay Koch dependent upon CTI's first being paid by MHA. This is particularly so in light of the following sentence in the clause, which provides: [t]he 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. This sentence illustrates that the parties certainly knew how to create a condition precedent if they so desired. That they did not use such unambiguous language in the first sentence prevents us from construing that sentence as a condition precedent to Koch's right to payment.