Contingent Payment Agreements – Construction Contracts
Contingent payment agreements are typically recognized in Louisiana jurisprudence as “pay-when-paid” or “pay-if-paid” provisions and are generally enforceable based on the fundamental notion of contractual freedom.[i] Such agreements commonly appear within construction subcontracts. While some courts have used the phrases “pay-when-paid” and “pay-if-paid” clauses interchangeably, Louisiana courts construe “pay-when-paid” clauses differently than “pay-if-paid” provisions. In Louisiana, “pay-if-paid” provisions are construed as transferring the risk of owner nonpayment to the subcontractor whereas “pay-when-paid” provisions are interpreted as simply delaying payment to a subcontractor until the owner pays the general contractor.[ii]
The Louisiana Supreme court has expressly enforced “pay-when-paid” provisions and interpreted them not as suspensive conditions, but rather as provisions creating terms for payment relating “to the time when [the] contractor must pay, and not the fact or certainty of such payment.”[iii] Under these payment agreements, a contractor’s obligation to pay the subcontractor arises upon the receipt of payment by the owner. Louisiana jurisprudence generally construes these payment provisions to mean 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.[iv] Accordingly, such agreements have been viewed by Louisiana courts as creating a timing mechanism only and not as imposing a condition precedent to the obligation to ever make payment.[v] Thus, Louisiana courts do not interpret these provisions as shifting the risk of nonpayment by the owner to the subcontractor.
Louisiana law does recognize that contingent payment provisions can be very burdensome for the subcontractor, particularly in situations where payments are withheld from the general contractor for a prolonged period of time typically arising in the event of an owner-general contractor dispute, or where the owner becomes financially unable to make any further payments to the general contractor. Thus, even when a “pay-when-paid” provision appears within a contract, Louisiana courts will typically require payment to the subcontractor by the general contractor within a reasonable period of time.
Additionally, in 1987, La. R.S. 9:2784 was amended to provide that if a contractor or subcontractor, without reasonable cause, fails to make any payment to the subcontractors or suppliers within fourteen consecutive days of the receipt of payment from the owner for improvements to an immovable, the contractor or subcontractor shall pay to the subcontractors and suppliers, in addition to the payment, a penalty in the amount of one-half of one percent of the amount due, per day, not to exceed 15% of the outstanding balance, together with reasonable attorneys’ fees.[vi] Further, under La. R.S. 14:202, a contractor may face criminal penalty including jail and fines for misappropriation of funds. If a contractor only receives partial payment from the owner, to escape criminal and civil liability, the contractor must still apply all funds to the payment of subcontractors, laborers, and materials, even if the amount paid is not adequate to pay all of the outstanding bills.[vii]
The Louisiana Supreme Court has yet to directly address the enforceability of “pay-if-paid” provisions, however, Louisiana appellate courts have upheld such provisions as creating a valid suspensive condition.[viii] Louisiana Civil Code article 1767 provides that an obligation subject to a suspensive condition depends upon the occurrence of an uncertain event. Accordingly, under Louisiana law, if a “pay-if-paid” provision appears within a construction subcontract, a general contractor’s obligation to pay the subcontractor arises if, and only if, he is paid by the owner.
However, because “pay-if-paid” provisions create a possibility that there may be an utter and complete failure of any payment to the subcontractor, Louisiana jurisprudence requires parties to use explicit language to indicate that payment by the owner is not contemplated by the parties as a reasonably certain event.[ix] Further, as a general rule of contractual interpretation, Louisiana jurisprudence holds that contractual provisions should be construed as not to be suspensive conditions whenever possible.[x]
[i] See Southern States Masonry, Inc. v. J.A. Jones Const. Co., 507 So.2d 198, 204 (La. 1987). Imagine Const., Inc. v. Centex Landis Const. Co., Inc., 707 So.2d 500, 502 (La.App. 4 Cir. 1998). Vector Elect. & Controls, Inc. v. JE Merit Constr., Inc., 2006 WL 3208462, at *4 (La.App. 1 Cir. 2006). Louisiana Civil Code article 1971 states, “[P]arties are free to contract for any object that is lawful, possible, and determined or determinable.”
[ii] Imagine Const., Inc., 707 So.2d at 502.
[iii] Southern States Masonry, Inc., 507 So.2d 198, 204. The Louisiana Supreme Court has recognized that the common law term “condition precedent” is analogous to the civilian term “suspensive condition.” Id. at 204 n. 15.
[iv] Id. at 204.
[v] Id. See also Chartres Corp. v. Charles Carter & Co., Inc., 346 So.2d 796 (La.App. 1 Cir. 1977); Pelican Const. Co. v. Sewerage and Water Bd. of New Orleans, 240 So.2d 556 (La.App. 4 Cir. 1970).
[vi] La. R.S. 9:2784(C). However, in the event the claimant loses he is obligated to pay all costs and attorneys’ fees of the defendant. Id.
[vii] State v. Weems, 595 So.2d 358 (La. App. 2 Cir. 1992); State v. Marshall, 808 So.2d 376 (La.App. 1 Cir. 2000)
[viii] Imagine Const., Inc., 707 So.2d at 502; see also Vector Elect. & Controls, Inc., 2006 WL 3208462, at *4.
[ix] C Bel for Awnings, Inc. v. Blaine-Hays Const. Co., 532 So.2d 830 (La.App. 4 Cir. 1988). See also Artificial Lift, Inc. v. Production Specialties, Inc., 626 So.2d 859 (La.App. 3d Cir. 1993).
[x] Southern States Masonry, Inc., 507 So.2d at 204.