Construction Claims Archive: Owner’s payment clause creates ambiguity for Pay-If-Paid

Owner’s payment clause creates
ambiguity for Pay-If-Paid

Int’l Eng’g Svs., Inc. v. Scherer Constr. & Eng’g of Cen. Fla., LLC,
2011 Fla. App. Lexis 16730 (Oct. 21, 2011)

A subcontractor prevailed on its claim that a pay-if- paid contract clause was ambiguous and therefore unenforceable.

International Engineering Services, Inc. (IES) was the structural steel sub on a project in Maitland, Florida. Although it completed all its obligations under the subcon- tract, it did not receive payment from the general contractor, Scherer Construction & Engineering (Scherer). Citing the subcontract’s pay-if-paid clauses, Scherer claimed that because it had not received payment from the project owner, its own obligation to pay IES had not yet occurred.

IES argued the subcontract’s two pay-if-paid clauses were ambiguous and that ambiguities with regard to final payment in subcontracts should be interpreted in the sub’s favor. It cited Peacock Construction Co. v. Modern Air Conditioning, Inc., 353 So. 2d 840 (Fla. 1977), where the Florida Supreme Court stated that because small subs could- n’t stay in business otherwise, in most cases, parties do not intend to make the owner’s payment to the contractor a con- dition precedent to the contractor’s duty to pay a sub. To shift the risk of the owner’s payment failure to the sub, the subcontract must unambiguously express that intention.

In fact, the first pay-if-paid clause in the Scherer-IES subcontract, which addressed progress payments, clearly did shift the risk: The provision made all pay- ments to the sub contingent upon the contractor’s receipt of payment from the owner and explicitly stat- ed that the sub “agrees to accept the risk of non-pay- ment if Contractor is not paid progress payments and/or final payment from Owner, for any reason.” When read together with the second clause—which stated that final payment to the sub would be due when final payment had been made by the owner to the contractor—the court found that the parties expressly and unambiguously intended to shift the risk of nonpayment to IES for both progress payments and final payment.

Luckily for IES, the story didn’t end there. The sub- contract incorporated by reference the prime contract, and its terms provided that the owner was not obligated to pay Scherer until Scherer had paid all its subs. The incorpora- tion of these terms made the subcontract’s pay-if-paid clauses ambiguous.

The court looked to an analogous situation examined in OBS Co. v. Pace Construction Corp., 558 So. 2d 404 (Fla. 1990) where the court explained that “in construing risk-shifting provisions, the burden of clear and unequivo- cal expression is on the general contractor” and held the contractor liable for the final payment it owed to the sub. The court in the instant case acted similarly, ruling that the ambiguity must be resolved against Scherer.

Editor’s Note: The court of appeals’ reasoning presents a close issue of contract interpretation. In shorthand, the owner was not obligated to pay the general contractor until the contractor had paid its subs. This language, incorporat- ed into the subcontract, was held to create an ambiguity when compared to the pay-if-paid clause. If this ruling stands, then general contractors may have to rethink their general incorporation by reference clauses in Florida.

Another way to look at the owner’s terms is to concen- trate on the exact language used. The general needed to show to the owner, prior to final payment, that its “indebt- edness” to its subs had been satisfied. A pay-if-paid clause arguably prevents “indebtedness” from arising.