F I L E D
United States Court of Appeals
Tenth Circuit
February 8, 2006
PUBLISH
Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
MIDAMERICA CONSTRUCTION
MANAGEMENT, INC., an Oklahoma
corporation,
Plaintiff - Appellant,
v.
No. 04-6231
MASTEC NORTH AMERICA, INC.,
a Florida corporation, and
RENEGADE OF IDAHO, INC., an
Idaho corporation,
Defendants - Appellees.
Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. CIV-03-1561-R)
Albert W. Murry, Murry Cox & Murry, Oklahoma City, Oklahoma, for Plaintiff-
Appellant.
Henry D. Hoss, McAfee & Taft, Oklahoma City, P.C., Oklahoma (Natalie K.
Ramsey, McAfee & Taft, Oklahoma City, Oklahoma, with him on the brief), for
Defendants-Appellees.
Before EBEL and TYMKOVICH, Circuit Judges, and BROWNING, District
Judge. *
EBEL, Circuit Judge.
In this case, we must determine whether a contract between two defendant
general contractors and a plaintiff subcontractor requires the general contractors
to pay the subcontractor for the work the subcontractor performed only if the
general contractors are first paid on their own contract with the project owner. In
making this determination, we address the type of language that constitutes a
“pay-if-paid” clause under both Texas and New Mexico law in a contract for a
private-sector construction project.
We AFFIRM the district court’s grant of summary judgment to Defendants
MasTec North America, Inc. (“MasTec”) and Renegade of Idaho, Inc.
(“Renegade”) on the claim of Plaintiff MidAmerica Construction Management,
Inc. (“MidAmerica”) that Defendants breached their contract with Plaintiff by
refusing to pay Plaintiff for the work Plaintiff performed under the contract. We
do so because we determine that (1) the contract contains a “pay-if-paid” clause;
(2) this clause is enforceable under both Texas and New Mexico law; and (3) as a
*
Honorable James O. Browning, District Court Judge, United States
District Court for the District of New Mexico, sitting by designation.
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result, Defendants need not at the present time pay Plaintiff for the work that
Plaintiff performed under the contract, because Defendants have not been paid by
project owner PathNet, Inc. (“PathNet”) for that work.
BACKGROUND
PathNet hired Defendant Renegade to help construct the New Mexico and
Texas portions of a fiber optic network. Defendant MasTec subsequently
purchased Renegade. On January 31, 2001, Defendants hired Plaintiff as a
subcontractor to help install a buried conduit for fiber optic line. The parties’
agreement was embodied in a written contract (the “Subcontract Agreement”).
Plaintiff began performing under the Subcontract Agreement. Defendants
made an initial payment of approximately $127,000 to Plaintiff in March 2001 for
work performed in January and February of that year. However, after PathNet
filed for bankruptcy in April 2001, Defendants refused to make any further
payments to Plaintiff because Defendants asserted that they had not received
payment from PathNet for the work Plaintiff performed.
In November 2003, Plaintiff brought suit against Defendants in the United
States District Court for the Western District of Oklahoma, contending that
Defendants owed it approximately $1.9 million for work performed under the
Subcontract Agreement. The district court denied Plaintiff’s motion for partial
summary judgment and granted Defendants’ counter-motion for summary
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judgment on all Plaintiff’s claims. Specifically, the district court held that a
provision in the Subcontract Agreement that provides that “all payments to
Subcontractor by Contractor are expressly contingent upon and subject to receipt
of payment for the work by Contractor from Owner,” was
unambiguous and makes Defendants (Contractor) receipt of payment
for the work from PathNet (Owner) a condition precedent to payment
of Plaintiff (Subcontractor). Thus, unless and until Defendants
receive payment for the work in question from PathNet, Defendants
have no duty to pay Plaintiff and Plaintiff acquires no right to
enforce the promise of payment.
The court stated that:
applying either New Mexico or Texas law or the law of both states,
the court enforces the contract as written and holds that Defendants
have no obligation to pay Plaintiff unless or until PathNet pays
Defendants.
The court also noted that:
because the Subcontract Agreement provides that it “may not be
amended except by a writing signed by each of the parties,” and may
not be modified or waived except in writing signed by both parties,
[Defendant’s] single payment to [Plaintiff] could not effect a
modification or waiver of the payment term making payment of
[Plaintiff] “expressly contingent upon and subject to receipt of
payment” by Defendants from PathNet.
Finally, the court found that a “termination clause” in the Subcontract Agreement
also barred Plaintiff’s claims for breach of contract. 2
2
Plaintiff brought additional claims based on promissory estoppel, quantum
meruit, unjust enrichment, and account stated. The district court denied the
(continued...)
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Plaintiff appealed from the district court’s order and judgment.
DISCUSSION
I. Jurisdiction, Standard of Review, and Choice of Law
Plaintiff’s notice of appeal was timely filed. See Fed. R. App. P.
4(a)(1)(A). We exercise appellate jurisdiction over its appeal pursuant to 28
U.S.C. § 1291, reviewing the district court’s grant of summary judgment de novo.
See Phillips v. New Hampshire Ins. Co., 263 F.3d 1215, 1218 (10th Cir. 2001).
The Subcontract Agreement provides that the contract “is governed by the
laws of the state where the Work is/was performed.” It is undisputed that
Plaintiff performed work pursuant to the Subcontract Agreement in Texas and
New Mexico. Neither party asserts that only one of these two states’ law should
apply; rather, both parties assert that both states’ law should apply. Thus, if the
Subcontract Agreement’s choice-of-law clause is enforceable, we must apply both
Texas and New Mexico law in interpreting the agreement.
In cases like this one, where subject matter jurisdiction is based on
diversity of citizenship, federal courts must look to the forum state’s choice-of-
law rules to determine the effect of a contractual choice-of-law clause. See Lyon
2
(...continued)
claims, and Plaintiff does not pursue them on appeal.
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Dev. Co. v. Bus. Men’s Assur. Co., 76 F.3d 1118, 1122 (10th Cir. 1996). Under
the law of the forum state in this case, Oklahoma, “a contract will be governed by
the laws of the state where the contract was entered into unless otherwise agreed
and unless contrary to the law or public policy of the state where enforcement of
the contract is sought.” Williams v. Shearson Lehman Bros., Inc., 917 P.2d 998,
1002 (Okla. Civ. App. 1995) (emphasis added). Because in this case the parties
agreed to be governed by the laws of Texas and New Mexico, we must determine
whether the application of those states’ laws to the interpretation of the
Subcontract Agreement would violate the law or public policy of Oklahoma as
expressed in the state’s constitution, statutes, or judicial records. See Oliver v.
Omnicare, Inc., 103 P.3d 626, 628-29 (Okla. Civ. App. 2004); see also Cameron
& Henderson, Inc. v. Franks, 184 P.2d 965, 972 (Okla. 1947).
As is explained more fully below, we conclude that the Subcontract
Agreement contains a “pay-if-paid” clause that is enforceable under both Texas
and New Mexico law, making PathNet’s payment of Defendants a condition
precedent to Defendants’ obligation to pay Plaintiff. Enforcing this clause does
not yield a result that violates the law or public policy of Oklahoma. There are no
Oklahoma cases interpreting “pay-if-paid” clauses, see John B. Hayes, Survey of
Payment Provision and Trust Fund Statute: Oklahoma, 24 Construction Law. 20
(2004)—and thus there are no Oklahoma cases stating that Oklahoma does not
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enforce such clauses. One frequently-cited Tenth Circuit case applying Oklahoma
law, Byler v. Great Am. Ins. Co., 395 F.2d 273 (10th Cir. 1968), suggests that
Oklahoma courts would enforce a contractual provision that conditions payment
upon the happening of a future event—such as payment of a general contractor by
a project owner—if required to do so by plain and unambiguous contractual
language. See id. at 276-77; see also United States v. Mann, 197 F.2d 39, 40-42
(10th Cir. 1952); Moore v. Continental Cas. Co., 366 F. Supp. 954, 955-56 (W.D.
Okla. 1973). There is no constitutional or statutory prohibition against “pay-if-
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paid” clauses in Oklahoma. 3 Therefore, we apply Texas and New Mexico law in
interpreting the Subcontract Agreement.
3
As is explained more fully below, statutory prohibitions against “pay-if-
paid” clauses typically take one of two forms: an antiwaiver provision in a state’s
mechanic’s lien statute, or an outright ban on conditional payment provisions.
Some legislatures also restrict the application of “pay-if-paid” clauses in order to
permit subcontractors to pursue bond claims or lien actions. However, the
Oklahoma legislature has not adopted any such measures that relate to “pay-if-
paid” clauses in contracts for private-sector construction projects.
In November 2004—after the parties entered into the Subcontract
Agreement, Plaintiff brought suit against Defendants, and the district court
granted summary judgment to Defendants—the Oklahoma legislature’s Fair Pay
for Construction Act took effect. See Okla. Stat. tit. 15, §§ 621-627 (2004),
renumbered as tit. 16, §§ 221-227 (2005). The act provides that:
[t]he following are against the public policy of this state and are void
and unenforceable:
1. A provision, covenant, clause or understanding in, collateral
to or affecting a construction contract that makes the contract
subject to the laws of another state or that requires any
litigation, arbitration or other dispute resolution proceeding
arising from the contract to be conducted in another state; . . . .
Okla. Stat. tit. 15, § 627(B). We need not decide whether the act applies
retroactively to the Subcontract Agreement because the act provides that
“‘[c]onstruction contract’ means a written contract or subcontract awarded . . . for
the purpose of making any public improvements or constructing any public
building or making repairs to or performing maintenance on the same.” Id. tit.
15, § 622(1); tit. 16, § 222 (emphasis added). Thus, the act could not apply to the
Subcontract Agreement, which is for the purpose of constructing a private fiber
optic network.
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II. The “Pay-if-Paid” Clause in the Subcontract Agreement
A. Legal and Contractual Framework
Construction contracts often contain provisions referred to as “pay-when-
paid” and “pay-if-paid” clauses. See Robert F. Carney & Adam Cizek, Payment
Provisions in Construction Contracts and Construction Trust Fund Statutes: A
Fifty-State Survey, 24 Construction Law. 5 (2004). Courts have not uniformly
applied these terms. See id. (“Some courts refer to both provisions as ‘pay-when-
paid’ clauses . . . .”). Still, the terms “pay-when-paid” and “pay-if-paid” refer to
distinct types of contractual clauses:
A typical “pay-when-paid” clause might read: “Contractor
shall pay subcontractor within seven days of contractor’s receipt of
payment from the owner.” Under such a provision in a construction
subcontract, a contractor’s obligation to pay the subcontractor is
triggered upon receipt of payment from the owner. Most courts hold
that this type of clause at least means that the contractor’s obligation
to make payment is suspended for a reasonable amount of time for
the contractor to receive payment from the owner. The theory is that
a “pay-when-paid” clause creates a timing mechanism only. Such a
clause does not create a condition precedent to the obligation to ever
make payment, and it does not expressly shift the risk of the owner’s
nonpayment to the subcontractor. . . .
A typical “pay-if-paid” clause might read: “Contractor’s
receipt of payment from the owner is a condition precedent to
contractor’s obligation to make payment to the subcontractor; the
subcontractor expressly assumes the risk of the owner’s nonpayment
and the subcontract price includes this risk.” Under a “pay-if-paid”
provision in a construction contract, receipt of payment by the
contractor from the owner is an express condition precedent to the
contractor’s obligation to pay the subcontractor. A “pay-if-paid”
provision in a construction subcontract is meant to shift the risk of
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the owner’s nonpayment under the subcontract from the contractor to
the subcontractor. In many jurisdictions, courts will enforce a
“pay-if-paid” provision only if that language is clear and
unequivocal. Judges generally will find that a “pay-if-paid”
provision does not create a condition precedent, but rather a
reasonable timing provision, where the “pay-if-paid” provision is
ambiguous.
Id. at 5-6 (footnotes omitted).
In this case, the Subcontract Agreement provides:
Upon final acceptance of the Work by Contractor and Owner,
Contractor will pay Subcontractor for the Work at the prices and
schedule and in the manner described on the Work Order(s); provided
that, all payments to Subcontractor by Contractor are expressly
contingent upon and subject to receipt of payment for the Work by
Contractor from Owner, even if (a) Contractor has posted a payment
bond with Owner or (b) the Primary Contract is on a “cost plus” or
other reimbursement basis requiring the Contractor to pay
subcontractors prior to being reimbursed by Owner.
B. Interpretation Under Texas Law
The Texas Supreme Court has not definitively determined where the line
between “pay-if-paid” and “pay-when-paid” clauses should be drawn. When the
highest court of a state whose law is being applied in a diversity case has not
decided the issue presented, we must determine what decision the court would
make if faced with the same facts and circumstances. See Progressive Cas. Ins.
Co. v. Engemann, 268 F.3d 985, 987 (10th Cir. 2001). In making that
determination, we may “consider a number of authorities, including analogous
decisions by the state Supreme Court, the decisions of the lower courts in the
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state, the decisions of the federal courts and of other state courts, and the general
weight and trend of authority.” Id. at 988 (quotations and alteration omitted).
“[W]here jurisdiction rests solely on diversity of citizenship and there is no
controlling decision by the highest court of a state, a decision by an intermediate
court should be followed by the Federal court, absent convincing evidence that
the highest court of the state would decide otherwise.” Webco Indus., Inc. v.
Thermatool Corp., 278 F.3d 1120, 1132 (10th Cir. 2002) (quotations and
alteration omitted).
In Gulf Construction Co. v. Self, 676 S.W. 2d 624 (Tex. Ct. App. 1984),
the Texas Court of Appeals stated:
A condition precedent may be either a condition to the formation of a
contract or to an obligation to perform an existing agreement.
Conditions may, therefore, relate either to the formation of contracts
or liability under them. Conditions precedent to an obligation to
perform are those acts or events, which occur subsequently to the
making of the contract, that must occur before there is a right to
immediate performance and before there is a breach of contractual
duty. While no particular words are necessary for the existence of a
condition, such terms as “if,” “provide that,” “on condition that,” or
some other phrase that conditions performance, usually connote an
intent for a condition rather than a promise. In the absence of such a
limiting clause, whether a certain contractual provision is a
condition, rather than a promise, must be gathered from the contract
as a whole and from the intent of the parties. . . . [W]here the intent
of the parties is doubtful or where a condition would impose an
absurd or impossible result, then the agreement should be interpreted
as creating a covenant rather than a condition. Also, it is a rule of
construction that a forfeiture, by finding a condition precedent, is to
be avoided when possible under another reasonable reading of the
contract. . . . The rule . . . is that:
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Since forfeitures are not favored, courts are inclined to
construe the provisions in a contract as covenants rather
than as conditions. If the terms of the contract are fairly
susceptible of an interpretation which will prevent a
forfeiture, they will be so construed.
Generally, a writing is construed most strictly against its author and
in such a manner as to reach a reasonable result consistent with the
apparent intention of the parties.
Id. at 627-28 (citations omitted); see also Criswell v. European Crossroads
Shopping Ctr., Ltd., 792 S.W. 2d 945, 948 (Tex. 1990) (laying out the interpretive
approach to be used in resolving a dispute between an owner and an engineer
using nearly identical language).
In this case, as noted above, the Subcontract Agreement provides that “all
payments to Subcontractor by Contractor are expressly contingent upon and
subject to receipt of payment for the Work by Contractor from Owner, even if . . .
the Primary Contract is on a ‘cost plus’ or other reimbursement basis requiring the
Contractor to pay subcontractors prior to being reimbursed by Owner.” The
Subcontract Agreement contains the necessary conditional language to make
PathNet’s payment of Defendants a condition precedent to Defendants’ obligation
to pay Plaintiff. Instead of using timing-related terms like “until,” which are
indicative of a “pay-when-paid” clause, cf. Self, 676 S.W. 2d at 627, the
Subcontract Agreement uses phrases associated with conditionality. Indeed, the
phrases “expressly contingent upon” and “subject to” in the Subcontract
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Agreement are similar to the words “if,” “provide that,” and “on condition that”
cited in Self as being indicative of the creation of a condition precedent. See
Black’s Law Dictionary (8th ed. 2004) (defining “contingent” as “[d]ependent on
something else; conditional”); see also A.J. Wolfe Co. v. Baltimore Contractors,
244 N.E. 2d 717, 720-21 (Mass. 1969) (“In the absence of a clear provision that
payment to the subcontractor is to be directly contingent upon the receipt by the
general contractor of payment from the owner, such a provision should be viewed
only as postponing payment by the general contractor for a reasonable time after
requisition . . . .”) (emphasis added). While the Subcontract Agreement might
have been more explicit, cf. Carney & Cizek, supra (noting that a typical “pay-if-
paid” clause might state that “the subcontractor expressly assumes the risk of the
owner’s nonpayment and the subcontract price includes this risk”), the
Subcontract Agreement’s failure to say all that it might have said is not enough to
throw the intent of the contracting parties into doubt. Cf. Self, 676 S.W. 2d at
628.
Though it did so only in passing, the Texas Supreme Court recently cited
Self approvingly, suggesting that the Texas Supreme Court would use the Self
approach in construing the Subcontract Agreement. See Interstate Contracting
Corp. v. City of Dallas, 135 S.W. 3d 605, 618 (2004) (stating that Self holds that
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“unless there is an express contractual provision to the contrary, a contractor is
ultimately responsible for payment of its subcontractors”) (emphasis added).
Case law from other jurisdictions does not provide “convincing evidence,”
Thermatool Corp., 278 F.3d at 1132, that the Texas Supreme Court would not
employ the Self approach. In Thomas J. Dyer Co. v. Bishop International
Engineering Co., 303 F.2d 655, 661 (6th Cir. 1962)—the seminal case on the
enforceability of “pay-if-paid” or “pay-when-paid” clauses—the Sixth Circuit
stated:
Normally and legally, the insolvency of the owner will not defeat the
claim of the subcontractor against the general contractor.
Accordingly, in order to transfer this normal credit risk incurred by
the general contractor from the general contractor to the
subcontractor, the contract between the general contractor and
subcontractor should contain an express condition clearly showing
that to be the intention of the parties.
Id. at 660-61; see also Lafayette Steel Erectors, Inc. v. Roy Anderson Corp., 71 F.
Supp. 2d 582, 587 (S.D. Miss. 1997) (“Dyer has been cited and relied upon
repeatedly . . . .”); Mrozik Constr., Inc. v. Lovering Assocs., Inc., 461 N.W. 2d
49, 51 (Minn. Ct. App. 1990) (describing Dyer as “a leading case on which the
Restatement [(Second) of Contracts] illustration was based”); Watson Constr. Co.
v. Reppel Steel & Supply Co., 598 P.2d 116, 119 (Ariz. Ct. App. 1979) (terming
Dyer “a leading decision in this area”); David R. Hendrick, John I. Spangler, III,
& Robert B. Wedge, Battling for the Bucks: The Great Contingency Payment
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Clause Debate, 16 Construction Law. 12, 17 (1996) (“The Dyer/Restatement
approach has been adopted in the majority of jurisdictions . . . .”). The fact that
the approach used in Dyer and its progeny is similar to the Self approach lends
credence to the conclusion that the Texas Supreme Court would employ the Self
approach.
Case law from jurisdictions that employ an approach that approximates the
Self approach suggests that the Texas Supreme Court would use the Self approach
to find that the “expressly contingent” clause in the Subcontract Agreement
constitutes a “pay-if-paid” clause, rather than a “pay-when-paid” clause.
Compare Robert F. Wilson, Inc. v. Post-Tensioned Structures, Inc., 522 So. 2d 79,
80 (Fla. Dist. Ct. App. 1988) (finding a condition precedent in contract stating
that “final payment is contingent upon payment to the Contractor” and that “[i]n
the event a controversy occurs between the Owner and the General Contractor
concerning the Contract with the Owner . . . no compensation for these items shall
be due the Subcontractor from the Contractor until payment for them is received
by the Contractor”) (quotations and emphasis omitted), with Moore, 366 F. Supp.
at 955-56 (noting that no condition precedent was created by a contract stating
that “Sub-Contractor will be paid in payments as and when Contractor receives
payments from the Owner . . . and where payments are made by the Owner upon
estimates or for percentages of work completed, Sub-Contractor shall then receive
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his proportionate part thereof. . . . The retained or remaining percent shall be paid
after final estimate is made and after the architect and the Owner has certified
their satisfaction as to the completion of this sub-contract, and after the
Contractor has been paid by the Owner.”) (quotations omitted), Peacock Constr.
Co. v. Modern Eng’g, Inc., 353 So. 2d 840, 841-43 (Fla. 1977) (noting that no
condition precedent was created by a contract stating that the general contractor
“would make final payment to the subcontractors, ‘within 30 days after the
completion of the work included in this sub-contract, written acceptance by the
Architect and full payment therefor by the Owner’”), and Watson, 598 P.2d at 120
(finding that no condition precedent was created by a contract stating that “‘THE
CONTRACTOR AGREES . . . to pay the Sub-Contractor, promptly upon receipt
thereof from the Owner, the amount received by the Contractor on account of the
Sub-Contractor’s work to the extent of the Sub-Contractor’s interest therein. . . .
At all times subcontractor shall be paid to the extent that the contractor has been
paid on his account.’”).
Thus, the clear conditional language in the Subcontract Agreement marks it
as a “pay-if-paid” clause enforceable under Texas law. As such, we hold that
under Texas law Defendants are not obligated to pay Plaintiff for the work that
Plaintiff performed under the Subcontract Agreement unless and until PathNet
pays Defendants for that work.
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C. Interpretation Under New Mexico Law
No New Mexico court has yet determined the enforceability of a “pay-if-
paid” or “pay-when-paid” provision. Both parties contend that a recent New
Mexico statute—the Retainage Act, N.M. Stat. Ann. §§ 57-28-1–57-28-11—sheds
light on the way that the New Mexico Supreme Court would interpret the
Subcontract Agreement. The Retainage Act states, in pertinent part, that:
all construction contracts shall provide that payment for amounts
due, except for retainage, shall be paid within twenty-one days after
the owner receives an undisputed request for payment. . . . All
construction contracts shall provide that contractors and
subcontractors make prompt payment to their subcontractors and
suppliers for amounts owed for work performed on the construction
project within seven days after receipt of payment from the owner,
contractor or subcontractor. . . . These payment provisions apply to
all tiers of contractors, subcontractors, and suppliers.
N.M. Stat. Ann. § 57-28-5(A), (C).
Plaintiff argues that because the Retainage Act mandates prompt payment
to subcontractors, New Mexico would be likely to find that a “pay-if-paid” clause
in a contract for a private-sector construction project—a clause that might
interfere with payments to subcontractors—is against public policy. Defendants
argue that the text of the act, by including the phrase “after receipt of payment
from the owner,” endorses contingent payments.
However, the fact that the New Mexico legislature has enacted this
provision sheds little light on whether a New Mexico court would enforce a
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bargained-for “pay-if-paid” clause in a contract for a private-sector construction
project. See Statesville Roofing & Heating Co. v. Duncan, 702 F. Supp. 118, 122
(W.D.N.C. 1988) (noting that a prior version of North Carolina’s equivalent of
the Retainage Act “addresses only the issue of what is to be done when the
general [contractor] has already been paid. It says nothing about what happens
when the owner does not pay.”). 4
Thus, we must look outside New Mexico for guidance on how the New
Mexico Supreme Court would interpret the Subcontract Agreement. As noted
above, the general weight and trend of authority holds that enforceable “pay-if-
paid” clauses may be created in contracts for private-sector construction projects
by using language clearly indicating the intent to create a condition precedent.
See also Richard A. Lord, 8 Williston on Contracts § 19:58 (2004) (“[I]t has long
been the rule that, if the parties clearly do intend that the risk of nonpayment be
borne by the subcontractor, and clearly express that intent by making the right of
the subcontractor to be paid expressly conditional on the receipt of such payment
by the contractor from the owner, they may by contract allocate that risk, and the
courts will enforce that freely bargained-for allocation of risk.”). Only a handful
4
Neither party contends that the Texas equivalent of the Retainage Act,
Tex. Prop. Code Ann. §§ 28.001–28.010, sheds light on the way that the Texas
Supreme Court would interpret the Subcontract Agreement. If the parties were to
make such an argument, the argument would fail for the reasons discussed in
connection with this analysis of the New Mexico Retainage Act.
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of states have determined that clearly drafted “pay-if-paid” clauses in contracts
for private-sector construction projects are not enforceable on public policy
grounds. Since it appears that the New Mexico Supreme Court would not find a
clearly drafted “pay-if-paid” clause in a contract for a private-sector construction
project unenforceable for the reasons expressed by these other states, it follows
that the New Mexico Supreme Court likely would find the “pay-if-paid” clause in
the Subcontract Agreement to be enforceable under New Mexico law. See
Hendrick, Spangler & Wedge, supra, at 23 (“[E]xcept for those states where
conditional payment provisions are unenforceable as a matter of public policy, a
conditional payment provision will be enforced if the clause utilizes the term
‘condition’ or ‘condition precedent,’ and if it is clear and unambiguous that the
subcontractor assumed the risk of owner nonpayment.”); see also id. at 27
(“Except for the jurisdictions which have, by statute, barred conditional payment
provisions, all courts enforce ‘pay-if-paid’ clauses, particularly where they are
unambiguous, and clearly provide that payment from the owner is a condition
precedent to payment to the subcontractor.”).
The highest courts in two states have voided “pay-if-paid” provisions in
contracts for private-sector construction projects as against public policy because
such clauses violate the antiwaiver protections in the states’ mechanic’s lien
statutes. See William R. Clarke Corp. v. Safeco Ins. Co., 938 P.2d 372, 374 (Cal.
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1997) (“[P]ay if paid provisions . . . are contrary to the public policy of this state
and therefore unenforceable because they effect an impermissible indirect waiver
or forfeiture of the subcontractors’ constitutionally protected mechanic’s lien
rights in the event of nonpayment by the owner.”); West-Fair Elec. Contractors v.
Aetna Cas. & Sur. Co., 661 N.E.2d 967, 971 (N.Y. 1995) (“[A] pay-when-paid
provision which forces the subcontractor to assume the risk that the owner will
fail to pay the general contractor is void and unenforceable as contrary to public
policy set forth in the Lien Law § 34 [which states that ‘any contract, agreement
or understanding whereby the right to file or enforce any [mechanic’s] lien . . . is
waived, shall be void as against public policy and wholly unenforceable’].”).
However, because New Mexico does not have an express antiwaiver provision in
its mechanic’s lien laws, cf. N.M. Stat. Ann. § 48-2A-12(B) (referring to a
“signed waiver of lien”), the reasoning in Clarke and West-Fair does not apply.
See 3 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner and O’Connor on
Construction Law, § 8:49 (2005); cf. Dayside, Inc. v. First Judicial District Court,
75 P.3d 384, 386-87 (Nev. 2003) (“Some state legislatures have declared a lien
waiver to be against public policy. But other state legislatures have expressly
permitted waivers. . . . Absent a prohibitive legislative proclamation, a waiver of
mechanic’s lien rights is not contrary to public policy.”) (footnotes omitted).
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Some state legislatures have prohibited conditional payment provisions in
contracts for private-sector construction projects. See N.C. Gen. Stat. § 22C-2
(“Payment by the owner to a contractor is not a condition precedent for payment
to a subcontractor and payment by a contractor to a subcontractor is not a
condition precedent for payment to any other subcontractor, and an agreement to
the contrary is unenforceable.”); Wis. Stat. § 779.135(3) (rendering void
“[p]rovisions making a payment to a general contractor from any person who does
not have a contractual agreement with the subcontractor or supplier a condition
precedent to a general contractor’s payment to a subcontractor or a supplier”).
However, the New Mexico legislature has enacted no statutory measure analogous
to those adopted by these other states. In the absence of guidance from the New
Mexico legislature, we decline to craft a state policy prohibiting the use of clearly
worded “pay-if-paid” clauses.
Thus, it appears that the New Mexico Supreme Court would interpret the
Subcontract Agreement as containing an enforceable “pay-if-paid” clause and
would enforce the clear condition in this contract as drafted by the parties. As
such, we hold that under New Mexico law Defendants are not obligated to pay
Plaintiff for the work that Plaintiff performed under the Subcontract Agreement
unless and until PathNet pays Defendants for that work.
III. Defendants’ Partial Payment to Plaintiff
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Plaintiff argues that a partial payment that Defendants made to Plaintiff
establishes that the parties intended that Plaintiff should be paid regardless of
whether Defendants were paid by PathNet. Plaintiff’s argument fails under both
Texas and New Mexico law.
Under Texas law,
[i]f a written contract is worded so that it can be given a definite or
certain legal meaning, then it is unambiguous. An ambiguity does
not arise simply because the parties offer conflicting interpretations.
Rather, a contract is ambiguous only if two or more meanings are
genuinely possible after application of the pertinent rules of
interpretation to the face of the instrument. Parol evidence is not
admissible for the purpose of creating an ambiguity. Only when a
contract is first determined to be ambiguous may the court admit
extraneous evidence to determine the true meaning of the instrument.
Coastal Mart, Inc. v. Southwestern Bell Telephone Co., 154 S.W.3d 839, 843
(Tex. App. 2005). In this case, the Subcontract Agreement’s consideration of
whether payment from PathNet is a condition precedent to Defendants’ obligation
to pay Plaintiff “can be given a definite or certain legal meaning.” Thus, under
Texas law external evidence like the partial payment may not be considered in
interpreting the alleged “pay-if-paid” clause in the agreement.
Under New Mexico law:
[a]n ambiguity exists in an agreement when the parties’ expressions
of mutual assent lack clarity. The question whether an agreement
contains an ambiguity is a matter of law to be decided by the trial
court. The court may consider collateral evidence of the
circumstances surrounding the execution of the agreement in
determining whether the language of the agreement is unclear. If the
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evidence presented is so plain that no reasonable person could hold
any way but one, then the court may interpret the meaning as a matter
of law.
Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (N.M. 1993) (citations omitted).
Because the partial payment made here was not part of the circumstances
surrounding the execution of the contract, this post-formation conduct would not
be considered by New Mexico for the purposes of creating an ambiguity under the
contract. In any event, that payment does not shed light on Defendants’ intent in
contracting. The fact that Defendants made a single partial payment to Plaintiff
before receiving payment from PathNet may be attributable to a host of factors,
including a desire to maintain a cooperative working relationship with Plaintiff,
provide an incentive for Plaintiff’s continued performance, or allow Plaintiff
operating capital to purchase supplies. Defendants’ single partial payment does
not signal a desire on the part of Defendants to be liable for all payments to
Plaintiff even if PathNet did not pay Defendants. The payment neither creates an
ambiguity in the agreement nor provides evidence of the parties’ intent sufficient
to overcome the indication of Defendants’ intent expressed in the plain text of the
Subcontract Agreement.
Therefore, the partial payment that Defendants made to Plaintiff does not
establish that the parties intended that Plaintiff should be paid regardless of
whether Defendants were paid by PathNet. As such, the payment does not disturb
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our conclusion that under both Texas and New Mexico law Defendants are not
obligated to pay Plaintiff for the work that Plaintiff performed under the
Subcontract Agreement unless and until PathNet pays Defendants for that work. 5
Plaintiff does not raise the argument that the partial payment modified or
5
waived the alleged “pay-if-paid” clause, stating in its brief that:
[Defendants] . . . and the district court . . . discuss this [partial
payment] issue in terms of waiver and rely on the provision in the
Subcontract Agreement providing that the contract “may not be
amended except by a writing . . . .” . . . However, [Plaintiff]’s
argument in this regard is not based on waiver. Rather, [Plaintiff]
asserts only that the payment is evidence of the parties’ intent and
their interpretation of their obligations pursuant to the Subcontract
Agreement and the provision for payment contained in the work
order.
Accordingly, we need not consider this issue. Even if we were to consider
whether the payment modified the Subcontract Agreement, we would find, like
the district court, that
because the Subcontract Agreement provides that it “may not be
amended except by a writing signed by each of the parties,” and may
not be modified or waived except in a writing signed by both parties,
Defendants’ single payment to Plaintiff could not effect a
modification or waiver of the payment term making payment of
Plaintiff “expressly contingent upon and subject to receipt of
payment” by Defendants from PathNet.
To the extent that Plaintiff argues that a work order issued by Defendants to
Plaintiff modifies or waives the “pay-if-paid” clause in the Subcontract
Agreement, that argument is without merit. The fact that the work order does not
reiterate the “pay-if-paid” clause, and instead states only that Plaintiff must
present a release of lien before final payment will be made, does not undercut the
condition precedent created by the “pay-if-paid” clause. In general such an order
does not alter the main terms of the contract, but rather serves as an execution
(continued...)
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IV. The “Termination Clause” in the Subcontract Agreement
Our conclusion that the parties intended PathNet’s payment of Defendants
to be a condition precedent to Defendants’ obligation to pay Plaintiff is buttressed
by an additional clause in the Subcontract Agreement that provides:
If the Primary Contract to which a Work Order refers is terminated,
suspended or delayed for any reason . . . . Subcontractor will only be
entitled to recover from Owner such amounts as are payable to
Contractor for the portion of the Work completed by Subcontractor,
less Contractor’s anticipated gross profit from the work.
Subcontractor is not entitled to mobilization, start-up, demobilization
or other amounts, or consequential, special, incidental, liquidated or
punitive damages, or for commercial loss or lost profits, unless such
amounts or damages are awarded to Contractor, in which case
Subcontractor may recover such amounts or damages for the portion
of the Work completed by Subcontractor less the same percentage
constituting Contractor’s gross profit retained by Contractor from all
other amounts payable by Owner. Subcontractor will not be entitled
to any other remedy for a termination, suspension or delay under this
Section . . . including any amounts directly from Contractor.
(Emphasis added.)
We need not and do not consider whether this provision—which the court
below characterized as a “termination clause”—is sufficient on its own to
constitute an enforceable “pay-if-paid” clause. Rather, the termination clause
5
(...continued)
document under the contract. For a work order to alter a condition precedent to
payment under a contract, the order must contain a more direct expression of an
intent to modify those terms than does the work order in this case. Any tension
between the work order’s requirement that Plaintiff present a release of lien
before receiving final payment, and the original contract’s statement that Plaintiff
waived all lien rights on signing the contract, is irrelevant for purposes of
interpreting the”pay-if-paid” clause.
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sheds light on the parties’ intent in agreeing to the “expressly contingent”
language in the “pay-if-paid” provision discussed above. The termination clause
makes clear that following the termination, suspension, or delay of the contract
between PathNet and Defendants, Plaintiff’s remedy under nearly all
circumstances is to seek reimbursement from PathNet—not Defendants. 6 There is
no definition in the Subcontract Agreement for the phrase “terminated, suspended
or delayed,” nor are the words used in the phrase defined individually. However,
the fact that the phrase is part of the larger expression “terminated, suspended or
delayed for any reason” makes clear that the phrase is to be given a broad
reading. Thus, the termination clause was triggered by PathNet’s breach of its
contract with Renegade based on PathNet’s bankruptcy, even though PathNet did
not formally negotiate an end to the contract. Therefore, the termination clause
supports our conclusion that since PathNet terminated its contract with
Defendants without paying Defendants for Plaintiff’s work, Plaintiff cannot now
seek to recover from Defendants the amount that Plaintiff asserts it is owed.
CONCLUSION
6
Based on the termination clause, it is at least arguable that Plaintiff should
be able to seek a recovery directly from Defendants if Defendants are awarded
mobilization, start-up, demobilization or other amounts, or consequential, special,
incidental, liquidated or punitive damages, or commercial loss or lost profits.
However, we need not conclusively determine whether this is the case because
there is no indication in the record that Defendants were awarded such sums.
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For the foregoing reasons, we AFFIRM the judgment of the district court.
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MidAmerica Construction Management, Inc. v. MasTec North America, Inc.
Court: Court of Appeals for the Tenth Circuit
Date filed: 2006-02-08
Citations: 436 F.3d 1257
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