Koch v. Construction Technology, Inc.

Brief Fact Summary.

Plaintiff sued Defendant for breach of contract when Defendant refused to pay Plaintiff the amount it owed to Plaintiff for the work he performed. Defendant alleged that it was not obligated to pay Plaintiff because payment by MHA is a condition precedent to Defendant’s obligation to pay Plaintiff. The trial court refused to award Plaintiff the full amount due him under the subcontract. The court of appeals affirmed.

Synopsis of Rule of Law.

Condition precedents, particularly in the context of “pay when paid” clauses, are not favored in contract law and will be interpreted as effecting the timing of payments not the obligation to pay.

Facts.

Construction Technology, Inc. (Defendant) subcontracted the painting portion of a Memphis Housing Authority (MHA) construction project to Koch (Plaintiff). The subcontract included a “pay when paid” clause, which provided, in part, that “payments subject to all applicable provisions of the Contract shall be made when and as payments are received by the Contractor.” After Plaintiff completed all his work, Defendant paid him $148,110.96 but refused to make additional payments because the MHA had not yet paid Defendant in full. Plaintiff sued for breach of contract. Defendant alleged that it was not obligated to pay Plaintiff because payment by MHA is a condition precedent to Defendant’s obligation to pay Plaintiff. The trial court refused to award Plaintiff the full amount due him under the subcontract. The court of appeals affirmed the judgment, holding that the “pay when paid” clause was a condition precedent to Defendant’s obligations to Plaintiff.

Issue.

Whether a “pay when paid” clause qualifies as a condition precedent to the obligation to pay.

Held.

No. The court of appeals’ ruling is reversed and remanded. Condition precedents, particularly in the context of “pay when paid” clauses, are not favored in contract law and will be interpreted as effecting the timing of payments not the obligation to pay.

Discussion.

“Pay when paid” clauses are usually construed as simply affecting the timing of payments that the general contractor is required to make to the subcontractor. There is no reason to shift the risk of the owner’s nonperformance from the general contractor to the subcontractor, unless the language of the contract clearly indicates the specific intent to do so. Just as the general contractor expects to be paid in full by the owner for his labor and materials, the subcontractor expects to be paid in full by the general contractor for his labor and materials. Even the insolvency of the owner will not defeat the claim of the subcontractor against the general contractor. The language in the “pay when paid” clause does not reveal the parties’ intention to shift the risk of the owner’s nonperformance to the subcontractor. The language is more clearly interpreted as a timing provision.