Young Elec. Contractors, Inc. v. Dustin Constr., Inc.

Decision Date24 May 2018
Docket NumberNo. 8, Sept. Term, 2017,8, Sept. Term, 2017
Citation185 A.3d 170,459 Md. 356
Parties YOUNG ELECTRICAL CONTRACTORS, INC. v. DUSTIN CONSTRUCTION, INC.
CourtCourt of Special Appeals of Maryland

ARGUED BY Leonard A. Sacks (Leonard A. Sacks & Associates, P.C., Rockville, MD), on brief, FOR PETITIONER.

ARGUED BY David B. Hamilton (Hillary V. Colonna, Womble Bond Dickinson (US) LLP, Baltimore, MD), on brief, FOR RESPONDENT.

ARGUED BEFORE: Barbera, C.J., Greene Adkins, McDonald, Watts, Hotten, Getty, JJ.

McDonald, J.

In a typical scenario in the construction industry, the owner of a construction project enters into a prime contract with a general contractor to erect or renovate a building. The general contractor then enters into subcontracts with suppliers and trade contractors, such as plumbers and electricians, to provide materials or to perform portions of the work. For various reasons, the owner of the project may later be unable or unwilling to pay the general contractor under the prime contract. What this means for the subcontractor depends on the terms of its subcontract with the general contractor.

A subcontract may contain a provision that relates payment of the subcontractor by the general contractor to the payment of the general contractor by the project owner. Some provisions, sometimes called pay-when -paid clauses, concern the timing of payment by the general contractor, but do not relieve the general contractor of its liability to the subcontractor under the subcontract. Other provisions, sometimes called pay-if -paid clauses, make the project owner's payment of the general contractor a condition precedent of the general contractor's obligation to pay the subcontractor and thus can relieve the general contractor of liability to the subcontractor, even though the subcontractor has fully performed its part of the subcontract.

This case concerns the propriety of an award of summary judgment in favor of a general contractor against a subcontractor based on a pay-if-paid clause. The subcontractor, Petitioner Young Electrical Contractors, Inc., sued the general contractor, Respondent Dustin Construction, Inc., in the Circuit Court for Montgomery County for breach of contract relating to a construction project in Virginia. Applying Virginia law, the Circuit Court held that a pay-if-paid provision in the subcontract applied to the damages sought in the action, determined that there was no dispute that the owner of the project had not paid the general contractor with respect to the matters in issue, and awarded summary judgment in favor of the general contractor. The Court of Special Appeals affirmed that decision, although for slightly different reasons.

We hold that the pay-if-paid clause relied upon by the Circuit Court, which was cited by neither party in motion papers or argument concerning summary judgment, does not necessarily apply to the issues in this case. Moreover, consistent with Maryland law concerning review of awards of summary judgment, we decline to seek other reasons to affirm the Circuit Court's decision. Accordingly, we vacate the judgment of the Court of Special Appeals and remand the matter to the Circuit Court for further factual development.

IBackground
A. "Pay–When–Paid" and "Pay–If–Paid" Clauses

In a typical construction project, the owner of the project contracts with a general contractor to carry out the project. The general contractor then enters into contracts with various suppliers and trades—the subcontractors—to provide the materials and carry out the actual construction. There is no necessary linkage between a subcontractor's or supplier's entitlement to compensation for performing a subcontract and the owner's performance of its obligations—primarily payment of the general contractor—under the prime contract. Thus, in the absence of an agreement to the contrary, a subcontractor that has completed its work is entitled to be paid regardless of whether the general contractor has been paid by the project owner. See J. Acret & A.D. Perrochet, Construction Litigation Handbook 3rd, § 4.4.

During the latter half of the twentieth century, general contractors began to include contingent payment provisions in their subcontracts. Although there apparently was no standard language, such a clause would typically provide that the general contractor was not obligated to pay the subcontractor until some specified number of days after the general contractor received payment under the prime contract from the owner of the project. Thus, for example, a window distributor that entered into a subcontract to supply windows for a project would not necessarily receive payment upon delivery of the windows, but would be required to await payment of the general contractor by the owner of the project.

Such clauses could be viewed as creating two different types of conditions. One interpretation of such a clause would view it simply as a timing provision—i.e. , it permits the general contractor to delay payment of the subcontractor until after it receives payment from the owner or (if that does not occur) some other period deemed reasonable, but does not relieve the general contractor of its obligation to compensate the subcontractor for its work. This interpretation might be viewed as a subcontractor-friendly version of the clause, as it considers the provision to govern when , but not whether , the subcontractor is to be paid by the general contractor.

Another interpretation of such a clause would view it as a condition precedent for payment of the subcontractor—i.e. , if the general contractor is not paid by the project owner under the prime contract, then the general contractor is not obligated to pay the subcontractor under the subcontract. In such a view, the subcontractor has not only agreed to provide materials or to perform work on the project, but is also providing the general contractor with a sort of insurance against the risk of non-payment by the owner—a risk usually associated with insolvency or bankruptcy of the owner. This might be viewed as a general contractor-friendly version of the clause.

Although the nomenclature used in the case law and legal literature has not been consistent, for purposes of this opinion we shall distinguish between these two types of clauses by adopting the terminology used in a number of recent cases.1 We shall refer to a provision that creates a timing condition as a "pay-when-paid" clause.

We shall refer to a provision that creates a condition precedent for the obligation to pay as a "pay-if-paid" clause." As is often the case, when there is a dispute as to whether a particular contract provision falls into one category or the other, the devil is in the details.

This case will require us to apply the law of Virginia to construe a subcontract and prime contract. To put that law in perspective, we review briefly the evolution of judicial treatment of such clauses.

The Majority Approach

Under what has frequently been described as the majority approach,2 a court will construe such a clause narrowly and interpret it to be a payment timing provision—i.e. , a pay-when-paid clause—unless the language of the provision clearly and necessarily creates a risk-shifting provision—i.e. , a pay-if-paid clause.

The leading case is Thos. J. Dyer Co. v. Bishop International Engineering Co ., 303 F.2d 655 (6th Cir. 1962). In that case, a general contractor entered into a subcontract with a plumbing subcontractor to install plumbing for a construction project at a race track. The plumbing subcontractor provided the services required by the subcontract, but there were cost overruns due to additional work requested by the owner and general contractor, some of which was outside the scope of the prime contract. When the plumbing subcontractor sought payment for the additional work, the general contractor declined because it had not been paid by the owner, which had become insolvent and filed for bankruptcy. The general contractor relied on language in the subcontract stating "no part of [payment] shall be due until five (5) days after Owner shall have paid Contractor[.]"

The Sixth Circuit observed that the "crucial issue" in the case was "whether ... [the contract provision] ... is to be construed as a conditional promise to pay, enforceable only when and if the condition precedent has taken place [i.e. , a pay-if-paid provision] ... or ... is to be construed as an unconditional promise to pay with the time of payment being postponed until the happening of a certain event, or for a reasonable period of time if it develops that such an event does not take place [i.e. , a pay-when-paid provision]." 303 F.2d at 659.

While the Dyer court conceded that the expressed intention of the parties ultimately governed the interpretation of a particular provision, it observed that courts had generally viewed such clauses as timing, rather than risk-shifting, provisions unless the contract language clearly indicated otherwise. After reviewing case law in Ohio and Kentucky concerning conditional payment clauses, the court concluded that "[t]he tendency of the courts is to hold that, unless the contract shows clearly that such an action is an express condition, the provision with reference to such act is inserted in order to fix the time of performance, but not to make the doing of such act or the happening of such event a condition precedent. If this is the intention of the parties, the fact that such act is not performed or that such event does not happen, does not discharge the contract, and the act which the parties agree to do upon the performance of such act or upon the happening of such event, is to be performed in at least a reasonable time." 303 F.2d at 660 (internal citations and quotations omitted).

The Dyer court rooted its analysis in its understanding of risk-sharing in the construction industry. The court considered it "basic in the construction business" for the general contractor to expect to be paid in full because it is "a fundamental...

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