Fourth Circuit Upholds Pay-When-Paid Clauses in Virginia Construction Contracts

This February, the United States Court of Appeals for the Fourth Circuit confirmed that subcontractors in Virginia face an almost insurmountable task when attempting to avoid an unambiguous pay-when-paid clause.

In Universal Concrete Products Corp. v. Turner Construction Co., 595 F.3d 527 (4th Cir. 2010), a subcontractor on the Granby Tower construction project in Norfolk, Virginia filed suit against the general contractor alleging that it had not been paid $885,507 for the installation of precast concrete. The general contractor, which had yet to be paid for approximately $14 million in work performed, moved for summary judgment on the basis of the subcontract's pay-when-paid clause. The district court granted summary judgment in favor of the general contractor and the subcontractor appealed.

On appeal, the parties agreed that the subcontract's pay-when-paid clause was unambiguous. The clause read: "The obligation of [the general contractor] to make a payment under the [subcontract], whether a progress or final payment, or for extras or change order or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner."  As Virginia law upholds unambiguous pay-when-paid clauses, the court held that the clause, standing alone, barred the subcontractor's right of recovery from the general contractor.  However, in an attempt to insert ambiguity into the pay-when-paid clause and avoid Virginia's strict application, the subcontractor pointed to a clause in the cost-plus prime contract that stated that the reimbursable costs included "[p]ayments made by the [general contractor] to Subcontractor in accordance with the requirements of the subcontracts." In finding that this clause lacked ambiguity, the court noted that the subcontractor only focused on the "payments made" and ignored the fact that the payments would be made "in accordance with the requirements of the subcontract." In addition, further language in the prime contract indicated that the general contractor could obtain payment without providing proof of payment to the subcontractor.

Two cases cited by the subcontractor from Florida and Missouri with similar contractual language in both the prime and subcontracts did give the court pause.  However, relying on prior decisions of the Virginia Supreme Court and a recent decision in a Virginia circuit court against another subcontractor on the Granby Tower project, the court found that Florida and Missouri applied pay-when-paid clauses less strictly than Virginia as a matter of public policy.  The Fourth Circuit held that, although the Florida and Missouri decisions were almost factually indistinguishable, the right of the parties to contract is paramount and, therefore, an unambiguous pay-when-paid clause is enforceable.

As Universal Concrete Products demonstrates, a Virginia subcontractor faces an uphill battle in attempting to avoid a pay-when-paid defense by the general contractor. Subcontractors are cautioned to carefully review their subcontracts to determine whether such clauses are present as well as to seek professional guidance in determining the applicable law. In addition, subcontractors should employ other payment mechanisms, such as mechanic's liens or payment bond claims, to obtain recovery when a direct cause of action against the general contractor is contractually barred.

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