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To create a pay-if-paid clause in a construction contract, the relevant contract terms must unequivocally state that the subcontractor will be paid only if the general contractor is first paid by the owner and set forth the fact that the subcontractor bears the risk of the owner's nonpayment.
Respondent Printz Services Corporation was the general contractor on a casino construction project in Cripple Creek, Colorado. Petitioners C.J. Masonry and Main Electric were subcontractors on the project. The relationship between Printz and C.J. Masonry was governed by a preprinted form contract prepared by Printz, the general contractor. The form contains a payment provision that stated that progress payment would be made on or before the 25th day of the next month following receipt of the Payment Request provided like payment has been made by Owner to Contractor, and that final payment would be made after work is complete and accepted by the owner. Main Electric did not sign a written form contract but agreed orally to work for Printz. Before the project was complete, the owner became insolvent and lost the property in a deed of trust foreclosure. The owner failed to pay Printz, and Printz in turn failed to pay its subcontractors. C.J. Masonry and Main Electric both sought payment for breach of contract against the general contractor. Printz claimed in defense that it was obligated to pay its subcontractors only if it was first paid by the owner.
Does Printz Servs. have to pay C.J. Masonry despite the owner’s insolvency?
Although the payment clause may be read to support the argument that the parties intended the subcontractors to be paid only if the owner paid the general contractor first, this clause contained no language reflecting any intent of the parties to shift the risk of the owner's nonpayment from the general contractor to the subcontractor. There is no express acknowledgement by the subcontractor that it, rather than the general contractor, agrees to assume the risk of the owner's nonpayment. The "provided" clause did not indicate that the parties reasonably anticipated the possibility that the owner might not pay and therefore specifically addressed this contingency. The payment clause contained no specific language creating a contingency that must occur before payment must be made by the general contractor. Thus, payment clause here left room for reasonable argument by both the general contractor and the subcontractor as to whether the parties intended to shift the risk of the owner's nonpayment from the general contractor to the subcontractor. Applying our rule interpreting a clause as a promise rather than a condition if there was any doubt of the parties' intention, this payment clause is a pay-when-paid clause. It created a promise to pay the subcontractor that remained unconditional, although payment may be delayed because of the owner's failure to pay the general contractor. The payment clause of this construction contract did not expressly reflect the parties' intent to shift the risk of the owner's nonperformance from the general contractor to the subcontractor with sufficient clarity to qualify as a condition precedent.