Tag: owner

Pay-When-Paid Clause in Subcontract Not Condition Precedent to Sub’s Right to Payment – IL Court

Pay-if-paid and pay-when-paid clauses permeate large construction projects

In theory, the clauses protect a contractor from downstream liability where its upstream or hiring party (usually the owner) fails to pay.

Beal Bank Nevada v. Northshore Center THC, LLC, 2016 IL App (1st) 151697 examines the fine-line distinction between PIP and PWP contract terms. a lender sued to foreclose

The plaintiff lender sued to foreclose commercial property and named the general contractor (GC) and subcontractor (Sub) as defendants.  The Sub countersued to foreclose its nearly $800K lien and added a breach of contract claims against the GC.

In its affirmative defense to the Sub’s claim, the GC argued that payment from the owner to the GC was a condition precedent to the GC’s obligation to pay the Sub.  The trial court agreed with the GC and entered summary judgment for the GC.  The Sub appealed.

Result: Reversed.

Reasons:

The Subcontract provided the GC would pay the Sub upon certain events and arguably (it wasn’t clear) required the owner’s payment to the GC as a precondition to the GC paying the Sub.  The GC seized on this owner-to-GC payment language as grist for its condition precedent argument: that if the owner didn’t pay the GC, it (the GC) didn’t have to pay the Sub.

Under the law, a condition precedent is an event that must occur or an act that must be performed by one party to an existing contract before the other party is obligated to perform.  Where a  condition precedent is not satisfied, the parties’ contractual obligations cease.

But conditions precedent are not favored.  Courts will not construe contract language that’s arguably a condition precedent where to do so would result in a forfeiture (a complete denial of compensation to the performing party). (¶ 23)

The appeals court rejected the GC’s condition precedent argument and found the Subcontract had a PWP provision.  For support, the court looked to the contractual text and noted it attached two separate payment obligations to the GC – one was to pay the Sub upon “full, faithful and complete performance,”; the other, to make payment in accordance with Article 5 of the Subcontract which gave the GC a specific amount of time to pay the Sub after the GC received payment from the owner.

The Court reconciled these sections as addressing the amounts and timing of the GC’s payments; not whether the GC had to pay the Sub in the first place. (¶¶ 19-20)

Further support for the Court’s holding that there was no condition precedent to the GC’s obligation to pay the Sub lay in another Subcontract section that spoke to “amounts and times of payments.”  The presence of this language signaled that it wasn’t a question of if the GC had to pay the Sub but, instead, when it paid.

In the end, the Court applied the policy against declaring forfeitures: “[w]ithout clear language indicating the parties’ intent that the Subcontractor would assume the risk of non-payment by the owner, we will not construe the challenged language…..as a condition precedent.” (¶ 23)

Since the Subcontract was devoid of “plain and unambiguous” language sufficient to overcome the presumption against a wholesale denial of compensation, the Court found that the Subcontract contained pay-when-paid language and that there was no condition precedent to the Sub’s entitlement to payment from the GC.

Take-aways

Beal Bank provides a solid synopsis of pay-if-paid and pay-when-paid clauses.  PIPs address whether a general contractor has to pay a subcontractor at all while PWPs speak to the timing of a general’s payment to a sub.

The case also re-emphasizes that Section 21(e) of the Illinois Mechanics Lien Act provides that the presence of a PIP or PWP contract term is no defense to a mechanics lien claim (as opposed to garden-variety breach of contract claim).

Illinois Mechanics’ Lien General Contractor Doesn’t Morph Into a Subcontractor When Property is Sold Before Recording

imageQ: Does a general contractor transform into a subcontractor where a property owner sells its property to a third party AFTER the general contractor completes its improvements but BEFORE it records its mechanics lien?

A:  No.

Q: Does it matter?

A: Yes.  Because unlike a general contractor, a subcontractor must serve a 90-day notice to the new owner in order to preserve its lien rights under Section 24 of the Mechanics’ Lien Act (the Act).  770 ILCS 60/24.  If the subcontractor doesn’t serve the 90-day notice, the lien is invalid against the third party buyer.

Those are the key questions and answers distilled from Dirtwerks Excavating, Inc. v. Koritala, 2013 IL App (2d) 130329-U, a December 2013 Second District case where real estate was sold by the original owner to various purchasers after a paving general contractor completed its work but before it timely filed its mechanics’ lien.

Facts:

Plaintiff general contractor timely recorded his lien against several properties within the four month time period required by Section 7 of the Mechanics’ Lien Act (the “Act”), 770 ILCS 60/7.  But before the contractor recorded its lien, the owner sold the properties to various home buyers.

Those home buyers successfully moved to dismiss the lien on the basis that the plaintiff converted to a subcontractor once the properties were sold.  And since the plaintiff contractor never sent a 90-day notice (per 770 ILCS 60/24), the contractor’s lien wasn’t enforceable against the defendants.

Held: Trial court reversed.  Plaintiff’s lien was proper, timely and valid against the homeowner defendants.

Reasoning:

Illinois Mechanics’ Lien Act: ‘Contractor’ v. ‘Subcontractor’

The Act’s purpose is to protect those who in good faith furnish material or labor for the improvement of real estate.  The Act permits a lien on the property where a (a) benefit has been received by the owner and (b) where the property’s value or condition has been increased or improved by the furnished labor or materials. ¶ 5. 

A “contractor” under the Act is any person who contracts with a land owner or someone authorized by the owner to enter a contract with the contractor.  A “subcontractor” is one who performs construction work for the contractor.  770 ILCS 60/1(a)(contractor def.); 770 ILCS 60/21(a)(subcontractor def.).  A subcontractor must serve the owner with written notice of its lien within 90 days after completion of the work.  770 ILCS 60/24.  A contractor does not have to comply with the 90-day notice requirement.  He (a contractor) only has to file his lien within 4 months of completion. 770 ILCS 60/7.

Can Unverified Pleading Come Back to Haunt You?

No.  A complicating factor in Dirtwerks was that plaintiff alleged in its original complaint that it was a subcontractor.  But in later complaint amendments, it alleged it was a general contractor.   But since the original complaint wasn’t verified, it was superseded by the later filed complaints. 

A verified complaint that is amended remains a part of the record and can be used to impeach the pleader.  Not so with an unverified pleading.  Once an unverified pleading is amended, it’s erased from the record.  Even so, the plaintiff’s allegation in the first complaint that it was a subcontractor wasn’t a binding admission since it was a legal conclusion (and not a factual allegation). (¶¶ 6-7).

Lien Claimants’ Status Is Determined by the Original Contracting Parties

The Court’s key holding is that the plaintiff’s status (general contractor or subcontractor) was determined by the original contracting parties.  Plaintiff originally contracted with an entity that owned the properties.  That the properties were later sold to third parties didn’t change plaintiff from a general contractor to a subcontractor (who was required to send a 90-day notice). (¶ 9).

The court pointed to cases dating back more than a century for the proposition that once a lien attaches on the date of the owner-general contractor contract, a property buyer takes the property subject to the lien – so long as the lien is recorded/perfected within the four-month window.  

In fact, Section 7 of the Act expressly binds subsequent property buyers.  That section states that a timely recorded lien binds a creditor, incumbrancer or purchaser.   (¶10); 770 ILCS 60/7.

Take-away: This seems like a fair result.  The contractor shouldn’t be penalized just because a prior owner happens to transfer the property to a new buyer before the contractor records its lien.  Dirtwerks also solidifies lien law axioms that a plaintiff’s status – be it contractor, subcontractor, or sub-subcontractor, is determined by the original contracting parties and a timely recorded lien will bind subsequent purchasers.