Southern States Masonry, Inc. v. J.A. Jones Const. Co.

• Decision Date: 18 May 1987
• Docket Number: 86-C-2544,Nos. 86-C-2443,s. 86-C-2443
• Parties: SOUTHERN STATES MASONRY, INC. v. J.A. JONES CONSTRUCTION COMPANY and Fidelity and Deposit Company of Maryland. Dorman STRAHAN d/b/a Strahan Painting Company v. LANDIS CONSTRUCTION COMPANY, INC. and United States Fidelity and Guaranty Company.
• Court: Louisiana Supreme Court

Page 198

507 So.2d 198

SOUTHERN STATES MASONRY, INC. v. J.A. JONES CONSTRUCTION COMPANY and Fidelity and Deposit

Company of Maryland.

Dorman STRAHAN d/b/a Strahan Painting Company v. LANDIS CONSTRUCTION COMPANY, INC. and United States Fidelity and Guaranty Company.

Nos. 86-C-2443, 86-C-2544.

Supreme Court of Louisiana.

May 18, 1987.

Rehearing Denied June 18, 1987.

Gerald Walter, Jr., Anne Jordan, Schwab & Walter, Baton Rouge, for applicant Southern States Masonry, Inc.

William Messersmith, III, Terrence Brennan, Deutsch, Kerrigan & Stiles, New Orleans, for respondents, J.A. Jones Const. Co. and Fidelity and Deposit Co. of Maryland.

William Wright, Jr., James Magee, Baldwin & Haspel, New Orleans, for applicant Strahan.

Gerald Gallinglhouse, New York City, for respondents Landis Const. Co., Inc. and U.S. Fidelity and Guar. Co.

CALOGERO, Justice.

These disputes between general contractors and subcontractors arose after the owner of the 1984 Louisiana World's Fair, Louisiana World Exposition, Inc. (LWE), filed for bankruptcy before having fully paid its general contractors. In each case, LWE entered into a construction contract with a general contractor. The general contractor, in turn, subcontracted out portions of the work. After LWE failed, the subcontractors demanded payment for the work they had satisfactorily completed. The contractors, relying on certain provisions in the subcontracts, refused to make final payment. The Fifth and Fourth Circuit Courts of Appeal ruled in favor of the general contractors in the respective cases, holding that the effect of the payment provisions in the subcontracts made payment by the owner to the contractor a suspensive condition to the contractor's obligation to make payment to its subcontractor. ¹ In effect, the rulings of the Courts of Appeal relieved the general contractors of making further payments to the subcontractors because LWE had defaulted in paying them. We granted writs of review ² and now reverse both Court of Appeal judgments. Our conclusion is that the contract provisions reciting essentially that the subcontractor would receive payment after receipt of payment by the general contractor from the owner (the so-called "pay when paid" clauses) are not suspensive conditions, but rather terms for payment which only delay the execution of the respective general contractors' obligations to make payment, and then only for a reasonable period of time.

In the Southern States Masonry case, J.A. Jones Construction Company (Jones) entered into a construction contract with LWE on October 1, 1982. Jones, in turn, entered into a subcontract with Southern States Masonry (Southern) on October 6, 1983, wherein Southern agreed to furnish concrete masonry work on the International Pavilion, the U.S. Pavilion, and the Amphitheatre. ³

Jones was paid by LWE for work billed and completed only through March, 1984. LWE's insolvency has prevented Jones' receipt of a portion of the contract price due them from LWE. After LWE filed for a Chapter 11 reorganization, Jones filed a proof of claim in the bankruptcy proceedings and has taken other steps in an effort to recover the remaining contract payment, but to date without avail. ⁴

On October 1, 1985, Southern filed suit, seeking recovery of all amounts owed it by Jones on the subcontract. ⁵ Jones admittedly refused to make any payments to Southern for work for which Jones had not already been paid by LWE. Jones based its refusal on the articles of the subcontract, which provide, in pertinent part:

2. Price. Subject to all of the other provisions of this Subcontract, Contractor shall pay to Subcontractor for the due and full performance of the Work the Subcontract Price....

3. ... Contractor shall pay to Subcontractor, upon receipt of payment from the Owner, an amount equal to the value of Subcontractor's completed work, to the extent allowed and paid by Owner on account of Subcontractor's Work....

4. Final payment. A final payment, consisting of the unpaid balance of the Price, shall be made within forty-five (45) days after the last of the following to occur: (a) full completion of the Work by Subcontractor, (b) final acceptance of the work by the Architect and Owner[,] (c) final payment by Owner to Contractor under the Contract.... (Emphasis added)

Exceptions of prematurity and no cause of action, together with a motion for summary judgment, were filed by Jones and its surety, Fidelity and Deposit Company of Maryland. The trial court granted the exception of prematurity and dismissed Southern's suit, holding that these contract provisions conditioned payment by Jones to Southern on further payment to Jones by LWE. As we have noted, this judgment was affirmed by the Fifth Circuit Court of Appeal.

A similar factual scenario developed in the Strahan/Landis matter. In that case, Landis Construction Company, Inc., after entering into a building contract with LWE, subcontracted with Strahan Painting Company for painting and other related work on the World's Fair Wonder Wall. ⁶ In its petition, Strahan alleged it had not been paid $23,449.62, a portion of the fully earned contract price. Landis refused to pay and argued that it was not obligated to make payments unless and until it received corresponding funds from LWE. Landis premised its refusal on the following provision of its subcontract:

IN CONSIDERATION WHEREOF, The said Contractor agrees that he will pay to the said Sub-Contractor the sum of Five Thousand Nine Hundred Thirty-Six Dollars ($5,936.00) for such materials and work, said amount to be paid as follows: ninety per cent (90%) of the value of the work completed and accepted each month for which payment has been made by said Owner to said Contractor, to be paid on or about the twentieth of the following month, except that final payment will be made by said Contractor to said Sub-Contractor immediately following final completion and acceptance of such materials and work by the Architect, and final payment received by said Contractor, and after satisfactory evidence has been furnished to said Contractor by said Sub-Contractor that all labor and material accounts for use on this particular work have been paid in full. (Emphasis added) ⁷

Strahan thereupon filed a Motion for Summary Judgment. The trial court granted partial summary judgment in favor of Strahan in the amount of $22,551.82. ⁸ In a five-member Fourth Circuit decision, the appeal court reversed, depriving Strahan of that district court judgment, and held that further payment by Landis to Strahan was conditioned upon further payment to Landis by LWE. One judge dissented.

It is axiomatic in Louisiana that courts are bound to give legal effect to written contracts according to the true intent of the parties. La.Civ.Code Ann. arts. 1945, 1949, 1950, and 1956, repealed by Act of July 2, 1984, No. 331, 1984 La.Acts 718 (recodified as amended at La.Civ.Code Ann. art. 2045 (West 1987)). ⁹ Where the words of a contract are clear and explicit, the intent of the parties is to be determined from the contract itself. La.Civ.Code Ann. art. 1945(3) [art. 2046]. However, if a provision in a written contract is doubtful or ambiguous, the provision must be interpreted against the party who prepared the agreement. La.Civ.Code Ann. art. 1958 [art. 2056]. ¹⁰ Finally, contractual provisions are construed as not to be suspensive conditions whenever possible. Schexnayder v. Capital Riverside Acres, 170 La. 714, 129 So. 139 (1930); Cahn Electric Co. v. Robert E. McKee, Inc., 490 So.2d 647, 652 (La.App. 2d Cir.1986).

The appeal courts found the respective quoted payment provisions clear and unambiguous, such that the effect of the provisions was to make payment by the owner to the contractor a suspensive condition to the contractor's obligation to make payment to its subcontractor. With this conclusion we disagree.

The recitations in both contracts were clear that the subcontractors would perform certain work, while the general contractors would make certain payments. In neither subcontract was it recited, or clearly implied, that the subcontractor was, in effect, an insurer of LWE's solvency. In neither subcontract was there any suggestion or implication that LWE's possible insolvency was even given consideration by the parties. In short, that LWE would pay the general contractor was presumed. In such circumstances, we conclude that the payment provisions do not constitute suspensive conditions which negate any obligation on the part of the general contractors until they are paid by the owner. Rather, the better reasoned view is that the provisions create terms for payment which at most retard the execution of the contractor's obligation for a reasonable time. See Strahan, 499 So.2d at 426 (Barry, J., dissenting). ¹¹

This court is addressing this issue for the first time. There is admittedly conflict among our courts of appeal concerning the effect of similar "pay when paid" clauses. In Miller v. Housing Authority, 175 So.2d 326 (La.App. 4th Cir.1965), modified on other grounds, 249 La. 623, 190 So.2d 75 (La.1966), the pertinent contract provided that "On the 10[th] day of each month, the Subcontractor shall present to the Contractor a statement of the work done during the preceding month, which statement when checked and approved by the Contractor, will be paid within 10 days after receipt of payment from the Owner." Miller, 190 So.2d at 77 n. 3. In Miller the court of appeal found this provision constituted a suspensive condition as to the general contractor's obligation to its subcontractor:

This provision was obviously intended to prevent the prime contractor from being compelled to assume the obligation of financing the construction of the Project in the event of default by the Owner.

Miller, 175 So.2d at 331.

While the Miller language favors the position taken by the general contractors, the case is distinguishable on its facts. The solvency of the owner in...