Nevada Supreme Court Finds That Pay-If-Paid Provisions in Construction Contracts Are Not Per Se Unenforceable Under Prompt Payment Act

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Snell & WilmerIn October, the Nevada Supreme Court revisited the enforceability of pay-if-paid clauses in construction contracts. Despite being enacted nearly two decades ago and being amended several times since, the Nevada Prompt Payment Act still garners differing opinions regarding the enforceability of pay-if-paid clauses, which the Nevada Supreme Court held requires a case-by-case analysis.

In broad terms, the Nevada Prompt Payment Act requires compliance with contractual terms of construction agreements and provides reasonable terms when specific terms are either missing or violate the statute. Specifically, NRS 624.628(3) protects a subcontractor’s statutory rights from modification by contract. The provision provides that:

A condition, stipulation or provision in an agreement which:

(a) Requires a lower-tiered subcontractor to waive any rights provided in NRS 624.624 to 624.630, inclusive, or which limits those rights;

(b) Relieves a higher-tiered contractor of any obligation or liability imposed pursuant to NRS 624.624 to 624.630, inclusive; or

(c) Requires a lower-tiered subcontractor to waive, release or extinguish a claim or right for damages or an extension of time ...

is against public policy and is void and unenforceable.

One of the rights that NRS 624.628(3)(a) protects includes a subcontractor’s right to prompt payment for labor, materials, and equipment. See NRS 624.624. For example, NRS 624.624(1)(a) provides that if a higher-tiered contractor enters into a written agreement with a lower-tiered subcontractor that includes a schedule for payments, the higher-tiered contractor shall pay the lower-tiered subcontractor: “(1) On or before the date payment is due; or (2) Within 10 days after the date the higher-tiered contractor receives payment for all or a portion of the work, materials or equipment described in a request for payment submitted by the lower-tiered subcontractor, whichever is earlier.”

In APCO Construction, Inc. v. Zitting Brothers Construction, Inc., 136 Nev. Adv. Op. 64, 473 P.3d 1021 (2020), APCO Construction was the general contractor on the Manhattan West mixed-use development project in Las Vegas owned by Gemstone Development West, Inc. APCO entered into a subcontract agreement with Zitting Brothers Construction, Inc., to perform wood-framing, sheathing, and shimming work on the project. The subcontract required APCO to pay Zitting for 100 percent of work completed during the prior month, minus a 10 percent retention, within 15 days of APCO receiving payment from Gemstone for Zitting’s completed work. Payment to Zitting was expressly conditioned upon APCO’s receipt of payment from Gemstone—commonly known as a “pay-if-paid” provision. The subcontract also conditioned APCO’s payment to Zitting of the retention amount on several specific conditions. It also stated that if the prime contract was terminated, APCO would pay Zitting for completed work after Gemstone paid APCO. Zitting worked for APCO until the prime contract between APCO and Gemstone was terminated in August 2008. Camco Pacific Construction Company subsequently became general contractor and Zitting continued to work for Camco until the project shut down in December 2008. As a result of the project’s failure, APCO, Zitting, and other subcontractors went unpaid and filed multiple lawsuits and mechanics’ liens.

Zitting sued APCO and Gemstone in 2009 for breach of contract, foreclosure of a mechanics’ lien, and various other claims. APCO raised various affirmative defenses in its answer, including that Zitting failed to meet conditions precedent for payment in the subcontract and that Gemstone never paid APCO to thus compel payment under the pay-if-paid provisions. The district court granted partial summary judgment in favor of Zitting’s breach of contract and mechanics’ lien claims, concluding that the pay-if-paid provisions were void and unenforceable. APCO appealed.

On appeal, the Nevada Supreme Court recognized the confusion regarding pay-if-paid clauses and clarified that these types of provisions “are not per se void and unenforceable. Rather, such provisions require a case-by-case analysis to determine whether they are permissible” under the Nevada Prompt Payment Act. The Court held that pay-if-paid clauses “are unenforceable if they require any subcontractor to waive or limit its rights provided under NRS 624.624-.630, relieve general contractors of their obligations or liabilities under NRS 624.624-.630, or require subcontractors to waive their rights to damages or time extensions.” Stated simply, if the pay-if-paid clause limits a lower-tiered subcontractor’s rights to payment under the Nevada Prompt Payment Act, it is unenforceable.

This reaffirms that contractors and subcontractors should be diligent and cautious with respect to drafting or agreeing to pay-if-paid clauses in their subcontracts

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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