Is Pay-if-Paid Enforceable in Kentucky?

Supreme Court in Kentucky Decides Pay-If-Paid is Enforceable

Is pay-if-paid enforceable in Kentucky? According to one recent Supreme Court decision, yes.

We’ve previously discussed pay-when-paid and pay-if-paid, otherwise known as contingent payment clauses. But, here’s a quick refresher on pay-if-paid.

Pay-if-paid is generally interpreted to mean the subcontractor will receive payment from the general contractor IF the general contractor is paid by the owner. In other words, if the owner fails to pay the general contractor, the general contractor doesn’t pay the subcontractor.

The Court Enforced the Contract

In Superior Steel, Inc. v. The Ascent at Roebling’s Bridge, LLC, the contractual provision in question lies within the contract between the subcontractor and the construction manager.

Essentially, the subcontractor furnished outside the scope of the original contract and did not execute change orders. Then, when the construction manager sought payment for the additional work from the owner, the owner refused to remit payment to the construction manager. Thus, based on the contractual terms between the construction manager and subcontractor, the construction manager did not have to pay the subcontractor.

In its decision, the court provided an example of a pay-if-paid clause:

“A typical `pay-if-paid’ clause might read: `Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk.”‘

Then, the court reviewed the plain language that appears within the contract. (Keep in mind, not only has the owner failed to pay the construction manager, but the subcontractor also failed to execute change orders.)

“[n]o additional compensation shall be paid by the Contractor to the Subcontractor for any claim arising out of the performance of this Subcontract, unless the Contractor has collected corresponding additional compensation from the owner, or other party involved, or unless by written agreement from the Contractor to the Subcontractor prior to the execution of the Work performed under said claim, which agreement and work order must be signed by an officer of the Contractor.”

Unjust Enrichment – Alternative Remedy

Author, Jeffrey R. Appelbaum, reviewed this case in his article Kentucky Supreme Court Enforces Pay-if-Paid Provision. In his review, he mentions that although the court enforced the pay-if-paid provision, the subcontractor is permitted to pursue unjust enrichment against the owner.

“[T]he court also relied on the pay-if-paid provision to reinstate the unjust enrichment verdict against the owner, concluding that although the equitable remedy of unjust enrichment does not exist when there is a contractual remedy, the existence of the pay-if-paid clause in the subcontract blocked the subcontractor from pursuing a contract remedy. As such, the subcontractor was permitted to pursue its claim for unjust enrichment against the owner, and that portion of the trial court’s judgment was reinstated.”

Two Takeaways

  • Always review your contract! Even when a state’s statute implies a clause is unenforceable

Kentucky Fairness in Construction Act “371.405 (2) The following provisions in a contract for construction shall be against the public policy of this Commonwealth and shall be void and unenforceable: (b): A provision that purports to waive, release, or extinguish rights provided by KRS Chapter 376, with the exception of partial waivers of lien rights provided by the contractor or subcontractor for progress payments”

  • If performing additional work or supplying additional materials, outside the original agreed upon contract, get approval for the additional work in writing!

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