Citation. 303 F.2d 655 (6th Cir. 1962)
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Brief Fact Summary.
Party 1, a general contractor, contracted with party 2, a sub-contractor, to provide certain plumbing related services on a project. The meaning of a provision in the contract concerning payment was at issue.
Synopsis of Rule of Law.
Paragraph 3 was a "reasonable provision designed to postpone payment for a reasonable period of time after the work was completed, during which the general contractor would be afforded the opportunity of procuring from the owner the funds necessary to pay the subcontractor."
The Appellee, Thos J. Dyer Company (the "Appellee"), was a subcontractor on a project in which the Apellant, Bishop International Engineering Company (the "Appellant"), was the general contractor. The Appellee was a plumbing company. The Appellee and the Appellant entered into a written contract on or about April 27, 1959, whereby the Appellee agreed to provide certain materials and install certain plumbing and utilities in the Appellant's construction project. The Appellee was to be paid $115,000. According to paragraph 3 of the contract, the payments to the Appellee were not to be "due until five (5) days after Owner shall have paid the Contractor therefore". The Appellee completed all of the work and provided all the material it was obligated to do under the subcontract. The Appellee also did other work for the Appellant, not contemplated in the April 27, 1959 agreement. The Appellee had only received ½ of the amount of money due to it by the Appellant, when the owner of the construction project declared bankruptcy. The Appellant refused to pay the Appellee the rest of the money owed to it, because the owner of the project did not pay it all the money owed. The Appellee sued to recover the balance and the district court granted summary judgment for the Appellee.
Does the contractual provision making the Appellant's payments to the Appellee not "due until five (5) days after Owner shall have paid the Contractor therefore" create a binding condition?
No, it is an unconditional promise. The court first observes that provisions in contracts "making certain obligations conditional or contingent upon the happening of a certain event are valid and enforceable." This is a question of contract construction or interpretation, not one of validity.
• The court first considers whether the language in Paragraph 3 applies only to the April 27, 1959 contract or also to subsequent work not covered by that agreement. The court concludes that the additional work completed by the Appellee, and evidenced by two change orders, was intended by the parties to be part of the original subcontract.
• The court then addresses how to construe the language in Paragraph 3 – "as a conditional promise to pay, enforceable only when and if the condition precedent has taken place, which in the present case has not occurred, or, as contended by the appellee, it 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 event does not take place." The court recognizes that the intention of the parties governs any particular case.
• Based on the facts before it, the court refused to transfer the general contractor's usual risk of an owner of a project becoming insolvent to a subcontractor. The court found that the parties' intended for the Appellee subcontractor to be paid by the Appellant contractor for the labor and material it provided. If the parties did not wish for such a construction of their agreement, they could have specified what was to occur if the owner became insolvent. As such, the court found that Paragraph 3 was a "reasonable provision designed to postpone payment for a reasonable period of time after the work was completed, during which the general contractor would be afforded the opportunity of procuring from the owner the funds necessary to pay the subcontractor." Any other construction would be unreasonable.
This case is very interesting to read alongside [New York Bronze Powder Co. v. Benjamin Acquisition Co.] to see how two courts construe arguably conditional language.