Bart Reed | Stoel Rives LLP | April 24, 2018
During Seattle’s current construction boom, general contractors and subcontractors may be concentrating more on finalizing work on their projects than on worrying about the niceties of their construction contract documents. It is no less prudent now, however, for the parties to remain aware of their contractual rights and responsibilities—especially those tied to payment. One payment term commonly contained in subcontract agreements is the contingent payment provision, which, depending on its terms, may pose an interesting challenge to construction lien rights.
Contingent payment provisions (e.g., “pay-if-paid” or “pay-when-paid” clauses) are frequently inserted in subcontract agreements. The hallmark of pay-if-paid clauses is usually “condition precedent” language, where the general contractor and subcontractor expressly agree that the general contractor’s receipt of payment from the owner is a condition precedent to payment by the general contractor to the subcontractor. Under this clause, the subcontractor assumes the risk of non-payment by the owner. On the other hand, pay-when-paid clauses have been interpreted to delay the subcontractor’s entitlement to payment until the owner pays, or for some reasonable time if the owner does not pay.
It is unclear whether Washington courts would enforce a pay-if-paid clause, but pay-when-paid clauses have been enforced. See Amelco Elec. v. Donald M. Drake Co., 20 Wn. App. 899, 902-03, 583 P.2d 648 (1978) (contract specifying that the subcontractor would receive payment only “to the extent that the Contractor has received payment . . . from Owner” did not create a condition precedent to the subcontractor’s payment; rather, it postponed payment for a reasonable period of time after the work was completed, during which the general contractor was afforded an opportunity to obtain funds from the owner to pay the subcontractor).
The challenge to construction lien rights could arise as follows: faced with a lien claim filed by a subcontractor, a general contractor may argue: “A lien must be supported by an underlying debt, and there is no debt here. You (sub) have no right to be paid by me, because I have not yet been paid by the owner.” Recall that a lien claim must be filed within 90 days of the claimant’s last work. If the “pay-when-paid” defense is accepted, it could deprive the subcontractor of its lien rights (if the owner fails to pay the general within 90 days of the sub’s last work). Should the general contractor be able to make this defense?
The answer is probably no under current Washington legal authority, although a Washington appellate court has yet to rule on the issue. Although general contractors may be pressured to exert such a defense (emanating from possible contractual duties owed to the owner to keep the property lien-free), the lien statutes in Washington are remedial in nature and liberally construed to safeguard the payment rights of those furnishing lienable improvements to real property. RCW 60.04.021.
A general contractor (as a “construction agent” of the owner) may assert defenses to the underlying debt—for example, that the claimed work was not done, or that the claimant has been paid. But, if the claimant has furnished labor, material, equipment or services to improve the property for which it has not been paid, a court will probably look for ways to permit the lien claim to go forward.
One possible approach would be to say that, when lien rights are in question, it is not “reasonable” for a general contractor to delay payment to a subcontractor more than 90 days, so the debt will always mature, as it were, in time for the lien filing. Another approach is to permit the lien filing but to stay any foreclosure lawsuit until a “reasonable” time for payment (as construed by the court) has expired. A third approach is to interpret the lien claim statute, RCW 60.04.091, which requires the claimant to list the “person indebted to the claimant,” to be satisfied by listing the general contractor, even if the general’s obligation to pay has not yet matured. Any of these approaches would, to some extent, enforce the pay-when-paid clause without stripping away the subcontractor’s lien rights.
It is unclear how a Washington court would handle the collision of two established principles, the enforcement of contracts and the protection of lien rights. Each case will depend on its unique set of facts and whether the general contractor seeks to rely on a pay-if-paid or a pay-when-paid clause. As long as this uncertainty remains, general contractors should be wary of relying on contingent payment clauses to challenge lien rights.