West Virginia Federal Court Reaffirms Meaning Of “pay if paid” Clause

In Ziegenfuss Drilling, Inc. v. Frontier-Kemper Constructors, Inc., the United States District Court for the Southern District of West Virginia, in Charleston, West Virginia, issued an opinion on August 20, 2009, holding that a pay if paid clause did not allow a general contractor to refuse payment to a subcontractor even if not paid by the owner.

In this project, Elkorn Coal Company was the owner, Frontier-Kemper the general contractor, and Frontier-Kemper subcontracted with Ziegenfuss Drilling, Inc. There were delays on the project, which the owner attributed to the general contractor and the subcontractor. The owner refused payment to the general contractor who then withheld payments from the subcontractor. The contract between the general contractor and the subcontractor contained a “pay-if-paid” clause. The West Virginia Supreme Court had previously stated that such unambiguous clauses in a construction contract are not to be construed as establishing true conditions precedent but instead fix the usual time for payment, with an implied understanding the subcontractor has an unconditional right to payment within a reasonable time. Willington Power Corp. v. CNA Surety Corp., 614 S.E.2d 680, 687 (W.Va. 2005). The West Virginia Federal Court held that this approach was consistent with the policy precluding forfeiture unless the event is within the parties’ control or the party assumes the risk. The federal court noted that the first illustration under the Restatement (Second) of Contract Section 227(1) involves a construction subcontract with a “no payment due until owner shall have paid contractor” provision. Under the Restatement (Second), the contractor is still obligated to pay the subcontractor after a reasonable time, even if the owner becomes insolvent and never pays the general contractor. The federal court held that West Virginia contract law conforms with the Restatement. The Court concluded that West Virginia, along with other states, would construe the language to create an obligation for the general contractor to pay the subcontractor when paid by the owner, but if no payment was forthcoming, then within a reasonable time.

Posted by: Denise H. McClelland

Categories: Claims / Dispute Resolution, Construction Contracts, Current Developments / Legislation, Federal and State Procurement / Bid Disputes