Pay-if-paid clauses can cause some serious problems when it comes time for subcontractors to get paid. So much so, that many states have prohibited their use as against public policy.
As far as Nevada is concerned, a recent Supreme Court decision clarified that pay-if-paid clauses are still enforceable. However, the enforceability of such clauses will be considered on a case-by-case basis to ensure they don’t interfere with the rights granted under the Nevada Prompt Payment Act.
Pay-if-paid clauses and prompt payment in Nevada
It’s been well-established in Nevada that pay-if-paid clauses that limit a subcontractor’s ability to file a mechanics lien are void and unenforceable.
However, the Nevada Prompt Payment Act was added to the state’s legislature back in 2001. One particularly important provision in this legislation is found under NRS 624.628(3):
A condition, stipulation, or provision in an agreement which:
(a) Requires a lower-tiered subcontractor to waive any rights provided in NRS 624.624 to 624.630, inclusive; or which limits those rights;
(b) Relieves a higher-tiered contractor of any obligation or liability imposed pursuant to NRS 624.624 to 624.630, inclusive; or
(c) Requires a lower-tiered subcontractor to waive, release, or extinguish a claim or rights for damages or an extension of time… is against public policy and is void and unenforceable.
So how do these provisions work in relation to a pay-if-paid clause? Are they still enforceable?
The answer is yes, but under incredibly limited circumstances.
Pay-if-paid clauses aren’t per se void and unenforceable in Nevada
The case in question is APCO Constr., Inc. v. Zitting Bros. Constr., Inc.
Project Snapshot:
- Owner: Gemstone Development West, Inc. (Gemstone)
- General Contractor: APCO Construction, Inc. (APCO)
- Subcontractor: Zitting Brothers Construction, Inc. (Zitting)
APCO was serving as the GC for the development of a mixed-use project in Las Vegas owned by Gemstone. Zitting was hired as a subcontractor to perform wood framing, sheathing, and shimming work.
The subcontract between the parties required APCO to pay Zitting for 100% of work completed in the month prior (minus retainage) within 15 days of receipt of payment from Gemstone; the pay-if-paid provision. Furthermore, if the prime contract was terminated, APCO would pay Zitting for completed work after APCO was paid.
As you can probably guess, the prime contract between APCO and Gemstone was eventually terminated before the project was completed. Zitting stayed on the project under the replacement GC, until the project was ultimately canceled.
Contractor defends claim based on pay-if-paid provision
Among the litany of lawsuits and mechanics liens that followed, Zitting sued APCO for breach of contract for nonpayment of $750,807.16 for work completed and accepted by APCO prior to their termination.
APCO responded by claiming a defense under the pay-if-paid clause in the subcontract. Gemstone had yet to pay APCO, so they argued they were under no obligation to pay Zitting until they had been paid by Gemstone.
The district court granted partial summary judgment in favor of Zitting, declaring that pay-if-paid provisions were per se void and unenforceable in Nevada.
APCO appealed.
Appeals court declares that pay-if-paid clauses are enforceable
Upon review, the appellate court noted that the district court had relied on a previous decision in Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc. which held that:
Because a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed, such a provision impairs the subcontractor’s statutory right to place a mechanics lien on the construction project. As noted above, Nevada’s public policy favors securing payment for labor and material contractors. Therefore, we conclude that pay-if-paid provisions are unenforceable because they violate public policy.
However, in that decision, the court noted that the contract was entered into prior to the inclusion of the prompt payment provisions in 2001.
The court went on to state:
To resolve any confusion that parties may still have on the enforceability of pay-if-paid provisions in Nevada, we clarify today that pay-if-paid provisions entered subsequent to the Legislature’s 2001 amendments are not per se void and unenforceable.
Rather, such provisions require a case-by-case analysis to determine whether they are permitted under NRS 624.628(3), and we hold that they are unenforceable if they require any subcontractor to waiver or limit its rights provided under NRS 624.624-.630, relieve general contractors of their obligations or liabilities under NRS 624.624-.630m or require subcontractors to waive their right to damages or time extensions.
Subcontract’s pay-if-paid clause limited prompt payment rights
Once the court established that such clauses are indeed enforceable, they turned their attention to the subcontract.
While the parties’ subcontract appears to contain a schedule of payments that requires APCO to pay Zitting within 15 days after payment from Gemstone, akin to a pay-when-paid provision, other provisions in the subcontract condition payment to Zitting solely upon APCO receiving payment from Gemstone- thereby making the subcontract unmistakably pay-if-paid.
Thus, despite the schedule for payments, Zitting wouldn’t be paid as required under NRS 624.624(1)(a) if APCO did not receive payment from Gemstone – even if Zitting performed its work, Gemstone accepted the work, and payment would otherwise be due.
Accordingly, such pay-if-paid provisions limit Zitting’s right to prompt payment under NRS 624.624(1) and limit Zitting’s recourse to a mechanics’ lien.
Therefore, the court concluded that the pay-if-paid provision was indeed void and unenforceable under NRS §624.628(3)(a).
So, ultimately, the district court reached the correct result, but for the wrong reason: The court didn’t “evaluate the clause” as part of “a case-by-case basis;” they reached a decision on this case by claiming the clause invalid due to being unenforceable without any further discussion.
But this case leaves an important question unanswered: When will a pay-if-paid clause be enforceable?
The court did reference a 2016 NV Supreme Court case that concluded “payment never became due to the subcontract under the subcontract or NRS 624.624(1)(a) because the owner never accepted the subcontractor’s work for defectiveness and never paid the contractor for the subcontractor’s work.”
Thus, in that case, payment never actually became “due.” That’s an extremely limited exception to enforcing a pay-if-paid clause, but that’s all Nevada contractors can rely on for now.
Additional thoughts from a Nevada-based construction attorney
Brian Pezzillo of Howard & Howard Attorneys PLLC‘s Las Vegas office weighed in on this case:
APCO Construction makes clear, the provision of Nevada’s prompt payment statutes (NRS 624.609, et al.) cannot be waived, including the timing provisions which mandate that payments be made to lower-tiered contractors according to the schedule set forth in the contract with a higher-tiered contractor… The Court has now made clear that even if an otherwise valid pay-if-paid clause exists, such clause will not be sufficient to withhold payment from a lower-tiered contractor if they have performed work which has been accepted.
The only instance identified by the Court in which a pay-if-paid clause would be enforceable is if the work performed by the lower-tiered contractor had not been accepted due to poor or improperly performed work…In short, if work is performed and accepted then payment must follow notwithstanding the existence of a pay-if-paid provision. Additionally, it appears that pay-if-paid provision might only be enforceable in situations when there is another independent basis to withhold payment.
This outcome places higher-tiered contractors in a difficult position. Ultimately, it is the owner of a project which accepts the work and receives the benefit of work performed by all contractors. Thus, a general contractor may find itself in the position of having performed work on behalf of an owner/developer, having not been paid, but still being obligated to make full payment to a lower-tiered contractor despite the fact that the general contractor has not received any benefit.
Contractors seeking to protect themselves may wish to condition payment upon the acceptance by the owner of the work performed by lower-tiered contractors. Arguably, what constitutes acceptance could be predicated upon certain conditions including, perhaps, payment. Any such contractual provisions should be carefully worded as its effectiveness is still subject to question, and it is clear from the holding of APCO Construction that any attempt to restrict payment to lower-tiered contractors will be subject [to] great scrutiny.
While some questions were answered regarding pay-if-paid provisions, many were left unanswered. The best course of conduct is to [carefully] review the contract payment terms contained in a party’s contract to ensure maximum compliance with Nevada law.