A “pay-if-paid” provision typically makes payment by an owner to a general contractor a condition precedent to the general contractor’s obligation to pay a subcontractor for work the subcontractor has performed.
In the recent decision of Helix Electric of Nevada, LLC v. APCO Construction, Inc. (related to the case above), the Nevada Supreme Court was tasked with determining the enforceability of such a clause under Nevada law. In Helix, a developer hired a general contractor, APCO Construction, Inc. (“APCO”), to build condominiums, and APCO subcontracted part of the work to Helix Electric of Nevada, LLC (“Helix”). Under the subcontract between APCO and Helix, retention would be released only upon the occurrence of several conditions, including the developer’s paying APCO, Helix completing its work on the project, the developer accepting that work, and Helix delivering close-out documents and claim releases to APCO. While working for APCO, Helix was paid the subcontract price, less the retainage.
As a preliminary matter, the Nevada Supreme Court noted that the right to retain funds on a construction project is governed by NRS 624.624(2)(a)(1), which authorizes a “higher-tiered contractor, upon written notice, to withhold from any payment owed to the lower-tiered subcontractor “[a] retention amount... pursuant to the agreement, but the retention amount withheld must not exceed 5 [(formerly 10)] percent of the payment that is [otherwise] required.” In addition, NRS 624.628(3) provides that a pay-if-paid provision although not void per se, will still be unenforceable if it (1) “require[s] subcontractors to waive or limit rights provided under NRS 624.624-.630”; (2) “relieve[s] general contractors of their obligations or liabilities” under those same statutes; or (3) “require[s] subcontractors to waive their rights to damages.”
In light of these statutes, the Nevada Supreme Court agreed with the trial court that, under NRS 624.628(3)(c), the pay-if-paid clause in the subcontract was void and unenforceable as it “require[d] Helix to waive its right to monies earned if APCO [did] not receive payment, even if Helix [met] its obligations, is not at fault for the events that led to nonpayment, and would otherwise have a claim for that retention.”
The key take away is that regardless of how well a pay-if-paid clause is drafted, states vary widely in how they treat such clauses. Certain states disallow pay-if-paid clauses, and hold them to be void and unenforceable. Other states, like Nevada, determine the enforceability of pay-if-paid clauses on a case-by-case basis. As a result, contractors should always pay close attention to how such clauses are treated in the states where they perform work prior to contracting so that they can adequately assess the risks associated with non-payment.