a:25:{s:9:"weblog_id";s:1:"5";s:8:"entry_id";s:2:"11";s:6:"sticky";s:1:"n";s:14:"allow_comments";s:1:"n";s:16:"allow_trackbacks";s:1:"n";s:10:"entry_date";s:19:"2008-03-29 11:37 AM";s:15:"expiration_date";s:0:"";s:23:"comment_expiration_date";s:0:"";s:9:"author_id";s:1:"1";s:10:"new_weblog";s:1:"5";s:6:"status";s:4:"open";s:14:"trackback_urls";s:0:"";s:18:"versioning_enabled";s:1:"y";s:5:"title";s:34:"Pay-if-Paid Clause Found Ambiguous";s:9:"url_title";s:34:"pay_if_paid_clause_found_ambiguous";s:6:"submit";s:6:"Update";s:11:"field_id_20";s:34:"Pay-if-Paid Clause Found Ambiguous";s:11:"field_ft_20";s:4:"none";s:11:"field_id_25";s:1:"6";s:11:"field_id_21";s:0:"";s:11:"field_ft_21";s:4:"none";s:11:"field_id_22";s:0:"";s:11:"field_ft_22";s:4:"none";s:11:"field_id_23";s:5325:"<p>A pay-if-paid clause in a subcontract must be very clear to be enforced
without the need for testimony from the contractor and the
subcontractor about their intent, the Eastern District Court of Appeals
decided recently. The case is Lobo Painting, Inc. v. Lamb Construction
Company, 231 S.W.3d 256 (Mo. App. E.D. 2007).</p>
<p>In reaching this result, a Missouri appellate court once again has
emphasized that <a href=\"/test\">pay-if-paid clauses</a> may be enforceable, but they must
be clearly worded and unambiguous. Otherwise, the parties to the
contract can offer their competing interpretations about whether
payment is due and ultimately will have to rely on a judge or jury to
decide who should prevail.</p>
<p>Pay-if-paid clauses are common in construction subcontracts. They
provide in some fashion that the contractor is not required to pay the
subcontractor until the owner has paid the contractor. The assumption
is that if the owner does not pay, then the contractor does not have to
pay out of its own pocket.</p>
<p>In this case, Lamb Construction Company as the contractor, had a
painting subcontract with Lobo Painting. The project was at a building
for West County EMS. Lamb Construction paid everything except for the
retainage of $2,441, because the owner was withholding final payment
from Lamb.</p>
<p>At trial Lamb Construction\'s representative and sole member Kevin
Lamb testified that he did not know why the owner was withholding final
payment. Lamb further testified that he believed under the subcontract
that he could withhold payment to his subcontractor until he received
the money from the owner.</p>
<p>The subcontract provision in question read: Final payment,
constituting the entire unpaid balance of the Subcontract Sum, shall be
made by the Contractor to the Subcontractor when the Subcontractor\'s
Work is fully performed in accordance with the requirements of the
Subcontract Documents, the Architect has issued a certificate for
payment covering the Subcontractor\'s completed Work and the Contractor
has received payment from the Owner. If, for any cause which is not the
fault of the Subcontractor, a certificate for payment is not issued or
the Contractor does not receive timely payment or does not pay the
Subcontractor within three working days after receipt of payment from
the Owner, final payment to the Subcontractor shall be made upon
demand.</p>
<p>The Eastern District, contrary to the trial court, found this
provision to be ambiguous. Ambiguity exists where the words in the
contract \"are susceptible of more than one meaning so that reasonable
persons may fairly and honestly differ in their construction of the
terms.\"</p>
<p>The second sentence, the appellate court found, can be read
different ways. On the one hand, it could be read that the clause \"for
any cause which is not the fault of the Subcontractor\" only applies to
the next part of the sentence that a \"certificate for payment is not
issued.\" In this case, if the reason for not issuing a certificate for
payment was other than subcontractor fault, payment would be due three
days after a demand from the subcontractor, regardless of whether the
owner had paid.</p>
<p>On the other hand, the second sentence could condition the
contractor\'s payment on receiving the money from the owner. In that
case, if subcontractor fault caused the owner not to pay, then the
contractor would have a contractual reason to withhold payment from the
subcontractor.</p>
<p>Naturally, at trial Lamb and Lobo had different understandings about
what the contract meant and what was their true intent. \"The ambiguity
in the contract cannot be resolved without first resolving the
conflicting testimony, which requires determining the witnesses\'
credibility,\" the appellate court held. Credibility is decided by the
trial judge or jury, not the appellate court.</p>
<p>The appellate court sent the case back to the trial court for it to
\"determine the party\'s intent,\" meaning who is more believable. That
can be difficult when neither party may have actually read the
provision at the time they entered into the contract.</p>
<p>Prior to this case, the Southern District Court of Appeals in
Missouri held that a pay-if-paid provision is enforceable if clearly
written and unambiguous. The case is Meco Systems, Inc. v. Dancing Bear
Entertainment, Inc., 42 S.W.3d 794 (Mo. App. S.D. 2001).</p>
<p>In Meco, the Southern District found a reasonably clear pay-if-paid
provision in a subcontract became much more unclear and ambiguous
because the subcontract incorporated the main contract between owner
and contractor. The main contract was a cost-plus fee arrangement and
required, as they often do, the contractor to pay its subcontractors
before seeking reimbursement from the owner. The court found this to be
in conflict with the subcontract language, thereby making the
subcontract ambiguous.</p>
<p>These cases reinforce the importance of having clearly worded
contracts on how payment is to take place. Ambiguity invites
conflicting testimony at trial, leaving the outcome up in the air.</p>
<p><em>James R. Keller is a partner at Herzog Crebs LLP where he
concentrates his practice on construction law, complex business
disputes, real estate and ADR. He also is an arbitrator and a mediator.</em></p>";s:11:"field_id_24";s:0:"";}