Watson Const. Co. v. Reppel Steel & Supply Co., Inc.

• Decision Date: 12 June 1979
• Docket Number: CA-CIV,No. 1,1
• Citation: 598 P.2d 116,123 Ariz. 138
• Parties: WATSON CONSTRUCTION COMPANY, a Minnesota Corporation, Appellant, v. REPPEL STEEL & SUPPLY COMPANY, INC., an Arizona Corporation, Appellee. 3744.
• Court: Arizona Court of Appeals

Page 116

598 P.2d 116

123 Ariz. 138

WATSON CONSTRUCTION COMPANY, a Minnesota Corporation, Appellant, v. REPPEL STEEL & SUPPLY COMPANY, INC., an Arizona Corporation, Appellee.

No. 1 CA-CIV 3744.

Court of Appeals of Arizona, Division 1, Department A.

June 12, 1979.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P. C., by Jeffrey B. Smith, Phoenix, for appellant

Jennings, Strouss & Salmon by Frederick J. Martone and William F. Haug, Phoenix, for appellee.

OPINION

HAIRE, Judge.

The basic issue on this appeal is whether a general contractor is liable to its subcontractor for breach of contract when the underlying construction project is terminated prior to its completion. The action in the trial court originated when Amfac Mortgage Corporation filed its complaint in foreclosure after construction had stopped on what was intended to be a regional shopping center in Tempe, Arizona. Although numerous other claims and parties were involved in the trial court proceedings the questions on this appeal concern only the general contractor, Watson Construction Co., and its steel subcontractor, Reppel Steel & Supply Co., Inc. Both Watson and Reppel were defendants in the foreclosure proceedings because they had filed lien claims against the subject real property. Defendant Reppel filed a cross-claim against defendant Watson for damages for breach of three separate subcontracts relating to the furnishing and erection of steel for the project. After considerable discovery, the trial court granted summary judgment in Reppel's favor and against the general contractor in the amount of $1,714,846.59.

On appeal from that summary judgment Watson contends that because of specific provisions in the subcontracts, it never became liable to Reppel, but that in any event, even if it became liable, there were genuine issues of material fact relating to the question of damages which precluded summary judgment.

Considering first the issue of liability, Watson contends that the subcontractor had no right to receive payment from the general contractor unless and until the general contractor had received payment from the owner. ¹ The essence of this argument is that the subcontractor agreed to look exclusively to such fund for payment, and that the existence of such fund therefore became a condition precedent to liability on the part of the general contractor to the subcontractor.

The provisions of the subcontracts that Watson relies upon in support of its condition-precedent argument are as follows:

"THE CONTRACTOR AGREES AS FOLLOWS:

"C. . . . to pay the Sub-Contractor, promptly upon receipt thereof from the Owner, the amount received by the Contractor on account of the Sub-Contractor's work to the extent of the Sub-Contractor's interest therein. . . .

"D. . . . At all times subcontractor shall be paid to the extent that the contractor has been paid on his account."

Reppel urges that the above-quoted provisions of the subcontracts do not create a condition precedent conditioning the general contractor's obligations so as to limit Reppel's right of recovery to a fund created by the owner's payment to the general contractor. Rather, Reppel urges, the subcontract agreements created fixed obligations with the quoted provisions merely providing a convenient or normal time for payment. We agree that the trial court correctly resolved this issue in favor of Reppel.

As a general rule conditions precedent are not favored and the courts are not inclined to construe a contractual provision as a condition precedent unless such construction is plainly and unambiguously required by the language of the contract. See Minthorne v. Seeburg Corp., 397 F.2d 237 (9th Cir. 1968), Cert. denied 397 U.S. 1036, 90 S.Ct. 1357, 25 L.Ed.2d 647 (1970); Restatement of Contracts § 261 (1932). Although we have not found any case involving contractual language identical to that contained in the subcontracts before this Court, we have reviewed several decisions involving similar provisions, and the majority hold, as a matter of law, that no condition precedent limiting recovery to a specific fund is created by provisions of this nature.

The Arizona decision most squarely in point is Darrell T. Stuart Contractor of Arizona v. J. A. Bridges & Rust-Proofing, Inc., 2 Ariz.App. 63, 406 P.2d 413 (1965). That decision involved an action by a sub-subcontractor to recover the balance claimed due from a subcontractor under an assumption agreement. The sub-subcontractor had agreed to perform work that the subcontractor had originally contracted to perform. The subcontract contained the following provision:

"The contractor shall pay the subcontractor's pay estimate (less ten percent (10%) retainage within ten days after receipt of payment by the contractor and as allowed by the Government. The 10% retainage shall be paid to the subcontractor upon completion of all work required of the contractor, and final acceptance and payment by the government."

2 Ariz.App. at 64, 406 P.2d at 414.

In addition, the assumption agreement provided:

"5. Payments to be made to the sub-sub-contractor (assumption agreement) 'Shall be made within ten (10) days after receipt of payments by Darell T. Stuart Contractor of Arizona from Dale Benz, Inc., J. W. Wells B. H. Oates under the subcontract marked Exhibit "A" and attached hereto.' "

2 Ariz.App. at 64, 406 P.2d at 414 (Emphasis added).

The sole issue was whether the above-quoted paragraph 5 constituted a condition precedent which barred the plaintiff's recovery until 10 days after receipt of payment by the defendant subcontractor from the general contractor. The Court held that the plaintiffs had not agreed to look to a specific fund from which, and only from which, payment was to be made, and quoted extensively from a leading decision in this area, Thomas J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6th Cir. 1962), as follows:

"It is, of course, basic in the construction business for the general contractor on a construction project of any magnitude to expect to be paid in full by the owner for the labor and material he puts into the project. * * * The solvency of the owner is a credit risk necessarily incurred by the general contractor, * * *. This expectation and intention of being paid is even more pronounced in the case of a subcontractor whose contract is with the general contractor, not with the owner. * * * he is primarily interested in the solvency of the general contractor with whom he has contracted. He looks to him for payment. Normally and legally, the insolvency of the owner will not defeat the claim of the subcontractor against the general contractor. Accordingly, in order to transfer this normal credit risk incurred by the general contractor from the general contractor to the subcontractor, The contract between the general contractor and subcontractor Should contain an express condition clearly showing that to be the intention of the parties."

Darrell T. Stuart Contractor of Arizona, supra, 2 Ariz.App. at 65, 406 P.2d at 415 (Emphasis in original; citations omitted).

Accordingly, since the contract before the court did not contain an express condition clearly and unambiguously showing that the intent was to create a condition precedent, judgment for the plaintiff was affirmed.

An example of a contract that does clearly and unambiguously show an intention to create a condition precedent is found in Campisano v. Phillips, 26 Ariz.App. 174, 547 P.2d 26 (1976). There an architect settled a dispute concerning nonpayment of his fees by entering into an agreement which provided that he was to be paid $15,000 "out of the first draw of the construction . . . loan", and $5,000 "out of the last draw from said . . . construction loan." The settlement agreement contained an additional provision that the "mode of payment as set out (above) shall be the method of payment and the only method of payment for the (architect's) work . . .." No construction draws were ever paid, and, accordingly, the architect was not paid. He sued for payment contending that he was entitled to be paid within a reasonable time, and that the receipt of construction draws was not a condition precedent to his right to be paid. The trial court entered judgment against him, and on appeal, the court stated:

"Our own research has disclosed the case of Kirchoff v. Cummard, 26 Ariz. 512, 226 P. 1092 (1924), which construed a contract using the words 'out of' not to limit payment to a particular fund. The court stated:

' . . . the (trial) court evidently concluded that by the term "provided, said payment be made," it was the intention of the parties to provide that the commission should be paid within a year, and out of the $7,500 if this installment should be received by appellant, but in case it was not, out of some other fund. There was ample evidence to support this view and full justification for the conclusion drawn therefrom by the court that in the absence from the contract of the word "exclusively," or "only," or some other expression having the effect of showing that the commission was payable from this fund and no other, the contract merely limited the time beyond which appellee was not required to wait for his commission.' 26 Ariz. at 520-21, 226 P. at 1094."

Campisano v. Phillips, supra. 26 Ariz.App. at 177, 547 P.2d at 29.

The court in Campisano then noted that the provisions in the architect's agreement were not limited to the "out of" language discussed in Kirchoff, but in addition provided that payment out of construction loan draws was to be the "only" method of payment. This was held to clearly create a condition precedent to liability, satisfying the Kirchoff standard that required a showing by the use of expressions such as "exclusively" or "only" demonstrating not only an intent that payment was to be made from a specified fund, but also that payment was to be made from that particular fund And no...