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Construction Law Alert, November 2018
A Newly Recognized Exception to Pay-if-Paid Provisions

November 19, 2018
Client Alert
A pay-if-paid provision provides that a general contractor does not have to pay its subcontractors unless the project owner pays the general contractor first. The logic behind such provisions is that if the general contractor were not paid first, it would essentially be giving the subcontractors an interest-free advance with the hope that it might be repaid by the owner sometime in the future. As general contractors will explain, they do not have the financial resources necessary to come out of pocket to make these types of advances. On the other hand, subcontractors will point out that such provisions penalize them even if they have done nothing wrong and the owner’s nonpayment has nothing to do with their work. In other words, if they did the work and did the work well, the owner nonpayment should not be their problem. Both sides have a point.

Until recently, the courts have been inclined to agree with the subcontractors’ arguments. In fact, the courts have historically construed pay-if-paid provisions in as limited a fashion as possible, sometimes even torturing the language of the provisions in order to conclude they are not true conditions precedent. That trend largely ceased after the Third Circuit’s decision in Sloan v. Liberty Mutual Ins. Co., 653 F.3d 175 (3d Cir. 2011). Sloan held that pay-if-paid provisions are valid and enforceable under Pennsylvania law and should be applied rather than construed (or misconstrued).

Recently, however, a federal court interpreting Pennsylvania law has recognized a new exception to the enforceability of pay-if-paid provisions. Connelly Constr. Corp. v. Travelers Cas. & Sur. Co. of Am., 2018 WL 3549281 (E.D. Pa. 2018). In Connelly, the court found that the “prevention doctrine” precludes a general contractor from relying on a pay-if-paid clause when it was the general contractor’s own conduct that contributed in some way to the owner’s nonpayment. The prevention doctrine provides that a party who materially contributes to the nonoccurrence of a condition precedent is deemed to have waived the condition. The Connelly court held that the general contractor’s conduct did not have to be deliberate or intentional for the prevention doctrine to apply; mere inadvertence was enough. Therefore, because the general contractor had inadvertently contributed to the owner’s nonpayment, it could not invoke the pay-if-paid provision as a defense to the subcontractor’s nonpayment claim.

The general contractor in Connelly argued that applying such a low threshold (i.e., inadvertence) to the application of the prevention doctrine would “eviscerate” the enforceability of pay-if-paid provisions. The point of such provisions is to protect the general contractor from having to pay out for work – even good work – that the owner has not yet paid for. The court rejected this argument and suggested that pay-if-paid provisions would still be fully enforceable for owner nonpayment that was not caused by deliberate or inadvertent general contractor conduct, such as weather delays.

The federal court in Connelly was merely anticipating Pennsylvania law on this subject. It remains to be seen whether the “prevention doctrine” becomes widely accepted.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2018 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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