Are "Pay-if-Paid" Clauses Valid in Nevada?

By Leon F. Mead II, Esq.

Six years ago, the State of Nevada was rocked by the opening of the Venetian Casino Resort. Not the opening night party but the legal battle over the interpretation of "common" construction clauses and their impacts on the Nevada construction business.
 

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The glare of the spotlight on the minimal legal guidance from Nevada courts available at that point brought many "issues of first impression" to the Nevada trial court handling the $450 million mechanics lien and construction claim case (In re: Venetian Casino Resort) as well as to the Nevada Supreme Court, and new and untested laws were passed by the Nevada Legislature. The reverberations can still be seen in many areas, including the current debate over the viability of a "pay if paid" clause.

A "pay-if-paid" clause is short-hand for a subcontract provision that shifts the burden of payment for a subcontractor's work from the general contractor to the owner, if the owner never pays the general contractor for the subcontractor's work. By making payment from the owner an "express condition precedent" to payment becoming due to the subcontractor, the general contractor seeks to insulate himself from the risk of the owner's non-payment. By contractually agreeing that payment is not due until the owner pays, the subcontractor bears the entire risk of owner default. Many American courts have held such clauses to be unenforceable; interpreting them instead to be "pay-when-paid" clauses which merely provide the general contractor a reasonable period of time (6 months or so) to collect the payment from the owner before the subcontractor is able to collect from the general contractor directly. Nevada's Supreme Court has never dealt with the viability of such clauses.

One of the legislative knee-jerk reactions to the Venetian case was the enactment of the Nevada Private Work Prompt Payment Act or "NPWPPA" (NRS 624.606, et seq.), which trumped many tools used by owners and higher-tier contractors to justify withholding payments to lower-tier contractors. In essence, the NPWPPA requires payment be made to lower-tier contractors within very short time limitations, except under significantly limited circumstances and then only after written notice is provided. If the withholding is disputed or not justified, a lower-tier contractor is legally authorized to stop working on the project until payment is made.

One of the legitimate reasons to not pay under the law is the existence of a "valid" clause making payment contingent upon receipt of payment from the owner; however, even in such circumstance the subcontractor is legislatively allowed to stop work. Nowhere in the NPWPPA is a pay-if-paid or pay-when-paid clause expressly authorized or validated. Moreover, as the NPWPPA provisions expressly invalidate contract clauses that waive or modify the provisions of the NPWPPA, a persuasive argument can be asserted that the clauses are invalid entirely. Based on the NPWPPA, some administrative representatives, such as investigators with the Nevada State Contractors' Board, have asserted that pay-if-paid provisions are invalid under the law. The Nevada Supreme Court has yet to take up the issue and most general contractors will not want to fund the litigation to obtain such a decision.

General Contractors therefore should be wary of relying solely on a "pay-if-paid" provision to justify failing to pay a subcontractor. While the NPWPPA does reference pay-if-paid clauses in several places, the overall effect of the legislation may be contrary to their enforceability. General contractors need to document legitimate problems with a subcontractor's work to justify a lack of payment, even when an owner is failing to pay. If withholding is not legally or factually justified, the wise general contractor becomes an advocate for his subcontractor. If the owner is not justifiably withholding a subcontractor's payment, the general must take steps under the NPWPPA to stop work on his own until the owner resolves the issue or run the risk of contractual liability to the subcontractor. While this may not entirely shield a general contractor from liability to the sub, it may engender a relationship that will make the subcontractor easier to deal with if the lack of payment results in a legal dispute.

Eventually, the effect of the NPWPPA on a pay-if-paid provision will be dealt with by a Nevada court. Until that time, a contractor cannot begin work in the State of Nevada and assume the laws that apply in other states apply here too. As a result of the Venetian (and other high profile construction cases), Nevada has its own set of rules that are simply unique. Being aware of the uniqueness may make the difference between success and failure for your business.


Leon F. Mead II, Esq. is the founding and managing partner of Mead Pezzillo LLP. Mead has established one of the most successful and respected law practices in Nevada. Mead Pezzillo specializes in construction law and can be reached at
(702) 233-4225 or www.meadpezzillo.com.