By: Thomas S. Tripodianos Published: May 2014

General Contractor Pay-When-Paid Policy

Question. Can a general contractor enforce a pay-when-paid policy when responding to a subcontractor’s claims for acceleration costs?

Answer. No

After a public bidding process, Public Owner contracted with General Contractor for the construction of a new high school in Manhattan. General Contractor subcontracted with Subcontractor for plumbing work on the project, by a written agreement.

Almost from the outset, extra work on the project arose. While these changes to the project usually resulted in changes to the schedule, Public Owner, at several junctures, also asked General Contractor to accelerate the work in order to maintain the contractual substantial completion date.  On several occasions, by email and letter, General Contractor directed Subcontractor to perform acceleration work, or reassured it that its acceleration work would be paid for.

General Contractor sent Public Owner a proposal for estimated acceleration costs to bring the project back on schedule.  A portion of that claim was earmarked for Subcontractor.

Public Owner responded to General Contractor's proposal and issued the acceleration change order.  General Contractor notified Subcontractor that General Contractor was going to "close" (accept) Public Owner's acceleration change order. Id. Ex. M. Subcontractor's share was reduced — allegedly due to Subcontractor's failure to provide certified payroll records to support its claim. General Contractor did in fact, sign off on Public Owner's acceleration change order.

Meanwhile, Subcontractor submitted multiple acceleration cost proposals to General Contractor for onsite labor costs and inefficiencies.

General Contractor in turn sent Public Owner a further revised acceleration proposal including Subcontractor's request.

At a meeting Public Owner informed Subcontractor that General Contractor had signed off on Public Owner's acceleration change order excluding Subcontractor's request.  This was reiterated by General Contractor in a letter to Subcontractor.

Subcontractor seeks payment of its acceleration claims from Surety and General Contractor.

General Contractor argues that Subcontractor may be compensated only for acceleration costs for which General Contractor was paid by Public Owner. Subcontractor contends, on the other hand, that it contracted with General Contractor and should be compensated by General Contractor for any work done at General Contractor's request. Several portions of the Contract are at the center of this dispute:

“The Subcontractor hereby waives and releases any and all claims, causes of action, and rights to additional payment and time extensions beyond the contract amount, except to the extent that General Contractor Construction Corp. may receive additional funds or extensions of time on Subcontractor's behalf for Change Orders and extra work from the Owner or Architect/Engineer."

Contract, ¶8.2.

It is expressly understood that the amount hereinabove stated for performance of the work herein represents the full consideration to be paid for said work and in no event shall there be any claims for 'extras' against General Contractor Construction Corp. unless General Contractor Construction Corp. agrees in writing to pay any extra amount. Any deviation from the foregoing provisions shall be null and void. Any changes, modifications or extensions of the work to be performed herein may only be done by written order specifically describing the work involved and executed by General Contractor Construction Corp. and the Subcontractor.

Id. ¶21.

General Contractor Construction Corp. may, upon written request of the Subcontractor, appeal or contest on behalf of the Subcontractor from any ruling or decision the Owner or Architect/Engineer, or institute any action or proceeding to recover damages by reason of any affirmative claim by the Subcontractor, or by reason of any deduction or refusal to pay by the Owner, for any reason, involving the work or performance of the Subcontractor.

Id. ¶8.

Corresponding to the Contract's three quoted paragraphs above, General Contractor contends that: (1) it did not get paid by Public Owner for the acceleration work claimed by Subcontractor; (2) General Contractor did not agree to pay for Subcontractor's acceleration work; and, (3) General Contractor was not asked by Subcontractor to contest Public Owner's rejection of payment for Subcontractor's acceleration work. General Contractor maintains that it paid Subcontractor for all work performed under the Contract, as General Contractor understands the Contract to mean, including two instances where acceleration work was indicated. General Contractor reads its Contract with Subcontractor to oblige payment to Subcontractor over and above the Contract amount only if agreed to in writing, pursuant to paragraph 21, and if paid for by Public Owner, pursuant to paragraph 8.2. Subcontractor reads the Contract to entitle it to get paid by General Contractor, even though Public Owner rejected the claims for Subcontractor's work put forth by General Contractor.

General Contractor and Surety rely upon paragraph 8.2 as its primary shield against Subcontractor's claim. It is undisputed that Public Owner did not pay General Contractor for most of Subcontractor's alleged acceleration work throughout the project. Therefore, General Contractor, having not "receive[d] additional funds or extensions of time on Subcontractor's behalf for Change Orders and extra work from the Owner," insists that Subcontractor has "waive[d] and release[d] any and all claims, causes of action, and rights to additional payment and time extensions beyond the contract amount." Contract ¶8.2.

Subcontractor characterizes paragraph 8.2 as a "pay when paid clause," and argues that, as such, it has been held void as against public policy.  General Contractor and Surety maintain that the Contract does not involve "pay-when-paid," because Subcontractor "mistakenly conflates its waiver of claims for delay, acceleration, or other extras against General Contractor Construction with the assumption or transfer of payment risk."  General Contractor and Surety read the contract as barring Subcontractor "from recovering on claims on which it fails to establish entitlement." However, this is not the Contract's language at paragraph 8.2. Ultimately, Subcontractor did not get paid in full, as it calculated, because, in General Contractor's words, the Public Owner did not find that Subcontractor substantiated that it was entitled to any acceleration costs.

Under these circumstances, General Contractor and Surety cannot resort to the improper use of paragraph 8.2, that is by attempting to enforce a pay-when-paid policy.

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