If you’re involved in construction, you undoubtedly have an opinion on “pay-if-paid” provisions in subcontract agreements. Such provisions seek to make a contractor’s payment to its subcontractor contingent on the contractor’s receipt of payment for the work performed by the subcontractor. Pay-if-paid provisions are subject to differing treatment throughout the US. Some states' statutes render pay-if-paid provisions void and unenforceable. However, pay-if-paid provisions remain enforceable in many states, including Missouri.
Late last month, in A. Zahner Company v. McGowan Builders, Inc., the Missouri Court of Appeals, Western District, reaffirmed the enforceability of pay-if-paid provisions. (No. WD78063 (Mo. Ct. App. May 24, 2016)). In Zahner, the general contractor and subcontractor agreed that the general contractor would “not be responsible to make any payment” to the subcontractor “unless and until [the general contractor] receive[d] payment for such goods from the Owner of the project[.]” Id. at *6. The provision went on to state that the subcontractor could stop work if it was “not paid within 45 days of when a pay application [was] submitted.” Id. The trial court, finding these two provisions to be in conflict, refused to allow the general contractor to present the pay-if-paid defense to the jury. Id.
The Court of Appeals reversed, holding that in Missouri, “if a ‘pay if paid’ provision is clear and unambiguous, it will be interpreted as setting a condition precedent to the general contractor’s obligation to pay.” Id. at *7 (citing MECO Sys., Inc. v. Dancing Bear Ent., Inc., 42 S.W.3d 794, 806 (Mo. Ct. App. 2001)). The Court went on to state that the provision should contain “magic language” such as “on condition that,” “provided that,” “if,” “unless or until,” or “some other phrase that conditions performance” in order to “aid in alleviating the ambiguity and making the parties’ intent explicit.” Id. at *8 (internal citations and quotation marks omitted). The Court held that the provision’s “use of the words ‘will not be responsible to make any payment … unless and until [the general contractor] receives payment … from the Owner’ clearly and unambiguously creates a condition precedent shifting the owner’s credit risk from [the general contractor] to [the subcontractor].” Id. at *9.
In Missouri, if you can benefit from including a pay-if-paid provision, you should consult an attorney to discuss how best to draft such a provision in your agreements in order to maximize the likelihood of enforceability. If you cannot benefit from the inclusion of a pay-if-paid provision, you should exercise caution before signing any agreement with such a provision, because it will likely be enforceable if properly drafted.