We’ve introduced pay when paid and pay if paid clauses in general, and started a state-by-state approach by discussing pay when paid clauses in Alabama. This post provides a more specific and in-depth look at pay when paid clauses in Arizona.
Overview of Arizona Pay When Paid Clauses Through Agro
As we’ve previously noted, the evaluation of pay when paid clauses always boil down to the same issue: Is the pay when pay clause a risk-shifting provision, or merely a timing provision? That is, the risk of owner non-payment shift from the contractor to the subcontractor, or does the subcontractor always have a right to get paid by the party who hired him, even if that party is never paid?
The Arizona Court of Appeals clarified its interpretation through the examination of a pay when paid clause pursuant to a dispute on a public project in L. Harvey Concrete, Inc. v. Agro Construction & Supply Company (939 P.2d 811).
Despite Arizona’s unfavorable view of pay when paid clauses in general, the pay when paid clause at issue here was sufficiently clear to create a binding condition precedent. The dispute in Agro arose after the Arizona Department of Transportation (ADOT) contracted Agro Construction & Supply (Agro) for the construction of an equipment storage building. Agro subsequently subcontracted with L. Harvey Concrete (L. Harvey) to perform excavation work on the property. L. Harvey was to be paid based on the amount of rock excavated from the property, and payment problems arose when L. Harvey excavated approximately three times more rock than the parties originally estimated would be required. Although Agro submitted L. Harvey’s pay requests to ADOT, ADOT refused to pay any more than the original estimate. The additional $25,781.25 for L. Harvey’s work became the subject of this dispute.
During lower court proceedings, Agro argued that since ADOT had never paid Agro for the work L. Harvey performed, Argo could not be held liable for paying L. Harvey. In support, Agro relied on the following contractual pay when paid provision:
Notwithstanding anything to the contrary in the preceding paragraphs of this agreement, subcontractor agrees as a condition precedent to payment, of either progress or final payment, that the owner shall have first paid the payment applied for to the contractor, and that payment for either progress payments or final payment is not due and owing to the subcontractor as provided for herein until the owner has made such payment to the contractor.
Both the lower court and the Court of Appeals agreed with Agro’s interpretation of the pay when paid clause: The clause mandated that payment from the owner to Agro was a condition precedent to L. Harvey getting paid.
The appeals court determined that, despite Arizona’s unfavorable view of pay when paid clauses in general, the pay when paid clause at issue here was sufficiently clear to create a binding condition precedent. Despite making this determination, the appeals court did not simply allow the non-payment of L. Harvey. The court merely decided that the pay when paid clause as written was sufficiently clear as to be enforceable. Even enforceable condition precedents, however, may be held invalid if they were premised upon fraud, error, or mistake of fact. In this case, the court remanded the matter back to the lower court for a determination as to whether a gross mistake of fact (determination of amount rock to be excavated) occurred, such that the condition may be excused.
Simplification Of, and Take-Aways From, Pay When Paid Interpretation in Arizona
Arizona courts have an unfavorable view of “pay when paid” or “pay if paid” clauses, and the burden for enforceability is tough. So, based on the above holding in Argo, and other Arizona cases reviewing the enforceability of pay when paid clauses in Arizona, what is the take-away rule of which Arizona contractors and subs need to be aware?
Arizona courts have an unfavorable view of “pay when paid” or “pay if paid” clauses, and the burden for enforceability is tough. Generally, an Arizona court will lean toward the determination of a pay when paid clause as a timing mechanism, rather than a risk-shifting technique. In order for a pay when paid clause to be enforceable to shift the risk of owner non-payment, the clause must be very carefully written, and must clearly and plainly state that the subcontractor agrees to be paid only from a specific fund, and that, if that fund is not created or does not receive sufficient funds, he will not be paid for all or some of his work.
The inclusion of pay when paid clauses in construction contracts always creates confusion about when and if payment is due. For now, such contract clauses may be enforceable in Arizona if sufficiently clear, but it is difficult – and the terrain seems to be shifting towards un-enforceability. Even clearly worded clauses have been struck down in some courts, following the more “California” view of pay when paid clauses violating public policy.