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Subcontractor denied payment due to contract language


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lmallory

By Laura Mallory

Despite a subcontractor not being paid for work allegedly performed, the Supreme Court of Arkansas dismissed the subcontractor’s complaint due to the fact that the subcontractor agreed to a pay-if-paid clause.

Background
A general contractor contracted with a subcontractor to perform excavation work on a project in Alabama. The contract between the general contractor and the subcontractor contained a pay-if-paid clause, which specified if the general contractor did not receive payment from the project owner for the work performed by the subcontractor, the general contractor did not have to pay the subcontractor. A dispute arose as to the amount of money owed to the subcontractor. The subcontractor filed a lawsuit seeking compensation for unpaid work.

Pay-if-paid clause
A typical pay-if-paid clause provides that a contractor’s receipt of payment from the owner is necessary in order for the contractor to have any obligation to pay the subcontractor. Therefore, the subcontractor, by entering into an agreement with a pay-if-paid clause, assumes the risk of the owner’s non-payment. Such pay-if-paid clauses are meant to shift the risk of the owner’s nonpayment from the contractor to the subcontractor.

Trial court decision
The general contractor argued it was entitled to a directed verdict as the subcontractor failed to present any evidence that it was paid for the work the subcontractor alleged it completed. The lower court agreed with the general contractor and held that the pay-if-paid clause in the contract barred recovery because there was no evidence the general contractor had in fact been paid for the work the subcontractor alleged it performed. The subcontractor appealed this decision. The subcontractor moved to transfer the matter to the Supreme Court, and the Supreme Court agreed to hear the matter.

Appeal
On appeal, the subcontractor argued that the court should not have considered the pay-if-paid clause because the general contractor did not plead or argue it. The Supreme Court disregarded that argument and held that the pay-if-paid clause is not an affirmative defense, so there is no requirement that it must be specifically pled or argued. Further, the Supreme Court agreed with the lower court and held that the pay-if-paid clause did bar recovery, as the subcontractor did not present evidence that the contractor was paid for the work the subcontractor performed.



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