May 20, 2015
TYMELESS FLOORING, INC.
ROTOLO CONSULTANTS, INC. AND FIDELITY DEPOSIT COMPANY OF MARYLAND
APPEAL FROM CIVIL DISTRICT COURT, ORLEANS PARISH. NO. 2013-10734, DIVISION " A" . Honorable Tiffany G. Chase, Judge.
Wayne J. Jablonowski, LAW OFFICE OF WAYNE J. JABLONOWSKI, APLC, Slidell, LA, COUNSEL FOR PLAINTIFF/APPELLANT.
John R. Walker, Bailey D. Morse, JONES, FUSSELL, L.L.P., Covington, LA, COUNSEL FOR DEFENDANT/APPELLEE.
(Court composed of Chief Judge James F. McKay, III, Judge Daniel L. Dysart, Judge Rosemary Ledet).
[2014-1392 La.App. 4 Cir. 1] Rosemary Ledet, Judge
This is a breach of contract suit. The narrow issue presented is whether the payment provision in the construction contract between the parties is a " pay-when-paid" clause--a term of payment--or a " pay-if-paid" clause--a suspensive condition. The trial court, finding that the contract contained a suspensive condition, sustained the dilatory exception of prematurity filed by the defendant, Rotolo Consultants, Inc. (" RCI" ), and dismissed without prejudice the suit filed by the plaintiff, Tymeless Flooring, Inc. (" Tymeless). From this judgment, Tymeless [2014-1392 La.App. 4 Cir. 2] appeals. For the reasons that follow, we find that the contract contains a term of payment--a " pay-when-paid" clause. Accordingly, we reverse and remand.
FACTUAL AND PROCEDURAL BACKGROUND
This case arises out of a construction contract between Dryades Young Men's Christian Association (" Dryades" ) and Ellis Construction, Inc. (" Ellis" ), the prime contractor, for a project known as the Dryades YMCA Natatorium and Wellness Center in New Orleans, Louisiana (the " Project" ). After contracting with Dryades, Ellis entered into a subcontract with RCI for certain portions of the work on the Project. RCI, in turn, entered into a subcontract with Tymeless to perform
additional work, as an extra to the contract (the " Subcontract" ). Tymeless was thus a subcontractor of a subcontractor on the Project.
After fully performing the work under the Subcontract, Tymeless invoiced RCI. Although RCI made a partial payment, it failed, despite amicable demand, to make full payment. On November 16, 2012, Tymeless filed a Statement of Claim and Privilege with the Orleans Parish Recorder of Mortgages in the principal amount of $24,595.00. On November 15, 2013, Tymeless commenced this suit against RCI. In its petition, Tymeless alleged that RCI was liable to it for the full amount of its lien claim, plus interest, attorneys' fees, and costs. In support of its [2014-1392 La.App. 4 Cir. 3] claim, Tymeless cited the Subcontract; the Private Works Act, La. R.S. 9:4801, et seq ; and the Open Account statute, La. R.S. 9:2781.
In response, RCI filed a dilatory exception of prematurity. The sole basis for RCI's exception was the payment provision contained in Section 5 of the Subcontract, which provides as follows:
Payments are to be made as follows: 90% of Sub-Contractor's approved invoices or pay request will be paid subject to the conditions following, after payment by the Owner for Sub-Contractor's work. Retention of 10% will be released upon satisfactory completion of this contract and release of final payment by the Owner.
RCI" s position was that the underlying proceeding is premature because the payment provisions contained in the contract have not been triggered. Stated otherwise, RCI's position was that the Subcontract specified that the amounts Tymeless was seeking to recover from RCI were not owed by RCI " unless and until" RCI itself was paid by Ellis. Given that Ellis had not yet paid RCI these amounts, RCI contended that Tymeless' suit to secure payment from RCI was premature.
[2014-1392 La.App. 4 Cir. 4] Agreeing with RCI, the trial court granted RCI's exception of prematurity and dismissed Tymeless' suit without prejudice. Tymeless then filed a motion for new trial, which the trial court summarily denied. This appeal followed.
An exception of prematurity poses the question of " whether the cause of action has matured to the point where it is ripe for a decision by the court." 1 Frank L. Maraist and Harry T. Lemmon, LOUISIANA
CIVIL LAW TREATISE: CIVIL PROCEDURE § 6.6 (1999). An exception of prematurity is governed by La. C.C.P. art. 423, which sets forth the following pertinent rules:
o When the obligation allows a term for its performance, the right to enforce it does not accrue until the term has elapsed.
o If the obligation depends upon a suspensive condition, the right to enforce it does not accrue until the occurrence or performance of the condition.
o When an action is brought on an obligation before the right to enforce it has accrued, the action shall be dismissed as premature, but it may be brought again after this right has accrued.
La. C.C.P. art. 423.
In this case, the dispositive facts are not disputed. The only dispute presented is a legal one. When, as in this case, " there is no dispute as to the dispositive facts, the issue can be decided as a matter of law and the review is de novo." Demma v. Automobile Club Inter-Insurance Exch., 08-2810, p. 7, n. 4 (La. 6/26/09), 15 So.3d 95, 100 [2014-1392 La.App. 4 Cir. 5] (citing Kevin Associates, L.L.C. v. Crawford, 03-0211, p. 15 (La. 1/30/04), 865 So.2d 34, 43).
The narrow legal issue presented in this case is whether, under the provisions of the Subcontract, the non-payment by Ellis (a primary contractor) to RCI (a subcontractor) is a suspensive condition--a " pay-if-paid" clause--to RCI's obligation to pay Tymeless (RCI's subcontractor). If so, then, as RCI contends and the trial court found, Tymeless' suit is premature. If not, then, as Tymeless contends, the provision is a term of payment--a " pay-when-paid" clause--and the trial court erred in granting the exception of prematurity and dismissing the suit.
In order to provide a framework for addressing the issue, we first summarize the jurisprudence distinguishing two types of payment clauses commonly inserted into construction contracts--" pay-when-paid" and " pay-if-paid" clauses. " The difference between a 'pay-when-paid' clause and a 'pay-if-paid' clause is vast." BMD Contractors, Inc. v. Fidelity and Deposit Co. of Maryland, 828 F.Supp.2d 978, 985 (S.D. Ill. 2011).
Explaining the vast difference between these two type of clauses, a commentator notes:
A " pay-when-paid" clause governs the timing within which a general contractor must remit payment to its subcontractor, linking the general contractor's receipt of payment from the owner to the general contractor's payment to the subcontractor. Under this type of provision, the general contractor must make payment to the subcontractor within a reasonable time, even if the general contractor does not receive payment from the owner.
[2014-1392 La.App. 4 Cir. 6] The more restrictive " pay-if-paid" clause, however, does not govern the timing of a general contractor's payment obligation, but rather dictates whether such payment obligations exist at all.
Where there is a valid " pay-if-paid" provision in the contract, the general contractor is only required to pay the subcontractor if and to the extent that it receives payment from the owner for the subcontractor's work. Thus, under a " pay-if-paid" provision, there is a transfer of risk of the owner's nonpayment from the general contractor to the subcontractor.
Ronald P. Friedberg, " PAY-IF-PAID" CONTRACT PROVISIONS,
Providing Some Enforcement Consistency and Predictability in an Unsettled Area
of Law, 57 No. 2 DRI For Def. 23 (2015).
A " pay-when-paid" clause is susceptible to the following two interpretations: " (1) as setting a condition precedent to payment or (2) as fixing the point in time when payment would ordinarily occur." Evans, Mechwart, Hambleton & Tilton, Inc. v. Triad Architects, Ltd., 196 Ohio App.3d 784, 794, 2011-Ohio-4979, 965 N.E.2d 1007, 1014 (2011). The majority view nationwide is that " pay-when-paid" clauses are timing mechanisms, not condition precedents. William M. Hill, Mary-Beth McCormack, Pay-If-Paid Clauses: Freedom of Contract or Protecting the Subcontractor from Itself?, 31 Construction Law. 26 (Winter 2011). Explaining the rationale behind the majority view, a commentator notes:
At first glance, a logical conclusion from [the " pay-when-paid" clause] language is that if the contractor does not receive payment from the owner, the contractor's obligation to pay the subcontractor never ripens. The majority of courts, however, refuse to literally enforce pay-when-paid clauses. Instead, the majority of courts construe pay-when-paid provisions as " timing" provisions, requiring payment from the general contractor to the subcontractor in a reasonable time after the work is performed, regardless of when the general contractor receives payment from the owner. In short, courts refuse to permit the shift of risk of the owner's lack of payment from the general contractor to the subcontractor based on pay-when-paid provisions. As rationale, courts usually point to the harsh effects of conditions precedent, and a general policy of avoiding them if another reasonable reading of a contract is possible.
[2014-1392 La.App. 4 Cir. 7] But most courts adopting this interpretation of pay-when-paid clauses leave open the possibility of enforcing these provisions when the language clearly and unequivocally shifts the owner's credit risk from the general contractor to the subcontractor. The magic language for creating an enforceable condition precedent is usually words like " on condition that," " if," " provided that," or by " some other phrase that conditions performance." Clauses that attempt to capture this explicit language are typically referred to as pay-if-paid clauses.
Id. at 26-27. " Courts that have enforced such [" pay-if-paid" ] provisions uphold the parties' freedom to contract in such a way that those least able to control or minimize the risk are nevertheless the ones most likely to suffer the consequences of its realization." 3 Bruner & O'Connor, CONSTRUCTION LAW § 8:47 (2014).
The seminal nationwide case on " pay-when-paid" clauses is Thos. J. Dyer Co. v. Bishop Intern. Engineering Co., 303 F.2d 655 (6th Cir. 1962), which espouses the majority view outlined above. The subcontract in Dyer provided that " no part of [the subcontract price] . . . shall be due until five (5) days after Owner shall have paid Contractor therefor." Dyer, 303 F.2d at 656. Rejecting the contractor's argument that the subcontract made payment by the owner a condition precedent to the contractor's obligation to pay the subcontractor, the court in Dyer reasoned as follows:
In the case before us we see no reason why the usual credit risk of the owner's insolvency assumed by the general contractor should be transferred from the general contractor to the subcontractor. It seems clear to us under the facts of this case that it was the intention of the parties that the subcontractor would be paid by the general contractor for the labor and materials put into the project. We believe that to be the normal construction of the relationship between the parties. If such was not the intention of the parties it could have been so expressed in unequivocal terms dealing with the possible insolvency of the owner.
Dyer, 303 F.2d at 661. Thus, the court's reasoning in Dyer regarding " pay-when-paid" clauses was premised upon its analysis of the usual relationships among the parties to the subcontract.
[2014-1392 La.App. 4 Cir. 8] The seminal Louisiana case on " pay-when-paid" clauses is Southern States Masonry, Inc. v. J.A. Jones Const. Co., 507 So.2d 198 (La. 1987), which adopted the majority view outlined above and cited Dyer with approval. The Southern States case involved claims by subcontractors against general contractors for payment in connection with the Louisiana World's Fair (the " Fair" ). The dispute was prompted by the bankruptcy of the Fair's owner, the Louisiana World Exposition, Inc. (" LWE" ). As a result of its bankruptcy, LWE defaulted on its debts to multiple contractors on the Fair project, which spawned multiple subcontractors to file claims. Defending these claims, the general contractors relied upon the " pay-when-paid" clauses in their subcontracts.
One of the Fair's general contractors was J.A. Jones; the J.A. Jones subcontract provided:
Contractor shall pay to Subcontractor, upon receipt of payment from the Owner, an amount equal to the value of Subcontractor's completed work . . .
A final payment consisting of the unpaid balance of the Price shall be made within forty-five (45) days after the last of the following to occur . . . (c) final payment by Owner to Contractor under the Contract.
Southern States, 507 So.2d 198, 200 (emphasis supplied). Relying on the language in the subcontract, J.A. Jones filed an exception of prematurity, which the trial court sustained and the appellate court affirmed. The Louisiana Supreme Court granted writs in the J.A. Jones case and consolidated it with another case, from this court, involving a similar factual scenario.
[2014-1392 La.App. 4 Cir. 9] Reversing both appellate court decisions and ruling in the subcontractors' favor, the Louisiana Supreme Court concluded that " the contract provisions reciting essentially that the subcontractor would receive payment after receipt of payment by the general contractor from the owner (the so-called 'pay when paid' clauses) are not suspensive conditions, but rather terms for payment which only delay the execution of the respective general contractors' obligations to make payment, and then only for a reasonable time." Southern States, 507 So.2d at 200 (emphasis supplied). In so holding, the Supreme
Court cited multiple rationales in support of its decision, including the following:
o The general rule of contract interpretation that " [c]ontractual provisions are construed as not to be suspensive conditions whenever possible." Southern States, 507 So.2d at 201 (citing Schexnayder v. Capital Riverside Acres, 170 La. 714, 129 So. 139 (1930); Cahn Electric Co. v. Robert E. McKee, Inc., 490 So.2d 647, 652 (La.App.2d Cir. 1986)).
o The relevant contract clauses each constituted a term under La. C.C. art. 2049, not a condition. Southern States, 507 So.2d at 203. The clauses dictated when, not if, the contractor's payment should occur. " The question in both subcontracts relative to payment by the contractor is not 'if' the subcontractors will be paid, but, rather, 'when' they will be paid." Id. at 204.
o The subcontracts were couched in mandatory terms--the J.A. Jones subcontract stated the contractor " shall pay" and that final payment " shall be made; " the other subcontract stated that the contractor " will pay." Id.
o The contingency of insolvency was not expressly addressed by the contractual clauses; " [i]t is not reasonable to infer from the language used in these contracts that the parties either agreed, or contemplated, that should LWE not pay the general contractors, then in that event the subcontractors would not have to be paid by the general contractors." Id. at 203-04. " [I]f [2014-1392 La.App. 4 Cir. 10] such was the intent of the parties it should have been expressed in clearer and more explicit language." Id. at 204, n. 12.
o The contract clauses were ambiguous; and " [t]he ambiguity in both contracts may have been somewhat alleviated had either general contractor used the conjunction 'if' in the payment provision in the subcontract." Id. at 206. The use of " if" in these provisions " might have evidenced the parties' intention to condition receipt of payment by the subcontractor upon receipt of payment from the owner to the general contractor." Id. Fatal to the general contractors' cases was their " failure to include such conditional language, or something even more explicit in the subcontractors." Id.
The Southern States case stands for the proposition that to create an enforceable " pay-if-paid" clause the parties' intent to do so must be explicitly expressed in their agreement. Including conditional expressions, such as " if" or " unless or until,"  aids in alleviating the ambiguity and making the parties' intent explicit; " [f]urthermore, where the parties intend to share any risk arising from an owner's unanticipated insolvency, the contract should provide explicitly for this contingency." Susan R. Laporte, Casenote, " Pay When Paid': Reasonable Time Term or Conditional Obligation? Southern
States Masonry, Inc. v. J. A. Construction Co., 34 Loy. L.Rev. 431, 447 (1988).
Tymeless cites the Southern States case as dispositive. In support, Tymeless contends that the language in the Subcontract in this case is indistinguishable from the language in the J.A. Jones subcontract in the Southern States case. Tymeless further contends that there is no difference in the meaning of " after payment by the owner" --the language in the Subcontract in this case--and " upon receipt of payment from the owner" --the language in the J.A. Jones subcontract in the [2014-1392 La.App. 4 Cir. 11] Southern States case. Tymeless thus contends that, like the contract in the Southern States case, the Subcontract in this case contains a " pay-when-paid" clause; hence, it submits that the trial court erred in dismissing its suit as premature.
RCI counters that the trial court correctly found the payment provision in the Subcontract operates as a suspensive condition--a " pay-if-paid" provision. RCI further counters that the Subcontract expressly provides that payments--both progress and final--by RCI to Tymeless are " subject to the conditions following" : (i) receipt of payment by the Owner for the Subcontractor's work; and (ii) release of final payment by the Owner. In support, RCI cites the following two cases in which Louisiana courts have found conditional payment arrangements fit the model of " pay-if-paid" provisions: Imagine Const., Inc. v. Centex Landis Constr. Co., 97-1653 (La.App. 4 Cir. 2/11/98), 707 So.2d 500; and Coastal Development Group, L.L.C. v. International Equip. Distributors, Inc., 10-1202 (La.App. 1 Cir. 2/11/11), 57 So.3d 613, ( unpub. ), 2011 WL 766608.
RCI contends that this court's reasoning in the Imagine case regarding the parties' recognition and acknowledgement of the possibility that the owner could fail to make payments is equally applicable in this case. The language of the Subcontract, RCI contends, anticipates the reasonably foreseeable possibility that Dryades, the owner, would fail to make payment under the general contract to Ellis, the general contractor; and that payment to RCI, Ellis' subcontractor, would be delayed, if not, completely denied. (As noted earlier, Tymeless is RCI's subcontractor.) According to RCI, the language of the Subcontract provides that its payment obligation does not arise " unless and until 1) it is paid by Ellis [the general contractor], who is paid by Dryades [the owner] and 2) Dryades releases final payment." Under these circumstances, RCI contends that since it has not been [2014-1392 La.App. 4 Cir. 12] paid, its payment obligation has not been triggered. RCI thus submits that Tymeless's suit seeking payment from it is premature.
The determinative factor in interpreting whether a payment provision is a " paid-when-paid" clause--a term of payment--or a " pay-if-paid" clause--a suspensive condition--is the language in the contract. Solomon & Filipowski, Inc. v. Boes Iron Works, Inc., 621 So.2d 882, 884 (La.App.4th Cir. 1993). Because of the harsh consequences of enforcing " pay-if-paid" clauses, the jurisprudence has imposed a requirement that to be enforceable, such clauses must contain " 'clear and unequivocal language set forth unambiguously on the face of the contract.'" Sloan & Co. v. Liberty Mut. Ins. Co., 653 F.3d 175, 181, n. 9 (3d Cir. 2011); Southern States, 507 So.2d at 206. Although no particular language is necessary, the jurisprudence has enforced " pay-if-paid" clauses that expressly include the following language: (1) payment to the contractor is a condition precedent to payment to the subcontractor; (2) the subcontractor is to bear the risk of the owner's nonpayment; or (3) the subcontractor is to be paid exclusively out of a fund the sole source of which is the owner's payment to the subcontractor.
Evans, Mechwart, Hambleton & Tilton, 196 Ohio App.3d at 791, 965 N.E.2d at 1012-13; see also Sloan & Co., supra.
Illustrative, this court in the Imagine case relied on the inclusion of the term " condition precedent" in the subcontract to find it contained a " pay-if-paid" clause. See Southern States, supra (noting that a condition precedent is the common law equivalent to the civilian concept of a suspensive condition). We reasoned that [2014-1392 La.App. 4 Cir. 13] the most important language in the subcontract was the condition precedent language--the statement that " the subcontractor agrees that full payment from the owner shall be a condition precedent to the bringing of any action by a subcontractor against the defendants." Imagine, 707 So.2d at 502 (emphasis in original). The condition precedent language, we noted, specifically recognized and acknowledged the possibility of the owner's complete failure of making either progress or full payments. Distinguishing the Southern States case, we reasoned that the subcontract before us " more specifically and explicitly sets forth language which particularizes that payment is to be made to the subcontractor only if actual payment is made to the contractor by the owner." Id. (emphasis in original). The possibility of the owner failing to make payment, we concluded, was reasonably foreseen and intended to be addressed by the language of the payment provision. Until actual receipt of payment from the owner, we held that any action by the subcontractor against the contractor was premature.
Unlike in the Imagine case, but like in the Southern States case, the Subcontract in this case does not contain " condition precedent" language. Nor does the Subcontract contain additional language that specifically recognizes the [2014-1392 La.App. 4 Cir. 14] possibility that there may be a complete failure of payment--that the subcontractor is to bear the risk of the owner's nonpayment. Nor, contrary to RCI's suggestion, does the Subcontract contain " unless and until" language. If the Subcontract did contain " unless and until," " condition precedent," or similar conditional language, RCI's argument might be persuasive.
In sum, the Subcontract contains no language that would qualify it as a " pay-if-paid"
clause; it is a classic " pay-when-paid" provision. Indeed, as Tymeless points out, the language in the Subcontract is indistinguishable from the language in the J.A. Jones subcontract in Southern States. We thus find the trial court erred in construing the language in the Subcontract as a " pay-if-paid" clause. Southern States, supra. (holding equivalent language is a " pay-when-paid" clause). Accordingly, we reverse the trial court's ruling, overrule the exception of [2014-1392 La.App. 4 Cir. 15] prematurity, and remand for the trial court to determine whether a reasonable time for the contractor to pay has elapsed.
For the foregoing reasons, the judgment of the trial court is reversed; and the case is remanded to the district court for further proceedings.
REVERSED AND REMANDED.