Are Pay-if-Paid Contract Provisions Valid in Nevada?

Nevada Pay-if-Paid ProvisionsPay-if-Paid Provisions and Nevada’s Policy Favoring Payment of Contractors

On any typical construction project, there is a lender, an owner, a general contractor, several subcontractors, and several suppliers. In an ideal situation, money passes from the lender to the owner, usually in the form of a loan, then the owner pays the general contractor for its work. The general contractor in turn pays its subcontractors, which in turn pay their suppliers.

However, payment circumstances in construction projects are often less than ideal, and money does not always change hands as anticipated. Because the general contractor depends on payment from the owner in order to pay the subcontractors, subcontracts often include pay-if-paid provisions. Pay-if-paid provisions typically provide that the general contractor is not obligated to pay its subcontractors for work performed until the general contractor receives payment from the owner for the same.

However, regardless of whether the owner ever pays the general contractor, the unpaid contractors are not without recourse—both the general contractor and subcontractor have lien rights against the construction property. If properly perfected, a lien recorded by a contractor endows the contractor with the right to foreclose on the property and recoup from the sale an amount equivalent to the value of work performed. See generally NRS 108. Nevada’s lien statutes are liberally construed to afford contractors recourse for nonpayment. See Las Vegas Plywood & Lumber, Inc. v. D & D Enters., 98 Nev. 378, 380, 649 P.2d 1367, 1368 (1982).

Indeed, Nevada has a strong public policy favoring the payment of contractors “who perform labor or furnish material to improve the property of the owner.” See Schofield v. Copeland Lumber, 101 Nev. 83, 85, 692 P.2d 519, 520 (1985). At least part of the reason behind this policy is that “contractors are generally in a vulnerable position because they extend large blocks of credit; invest significant time, labor, and materials into a project; and have any number of workers vitally depend upon them for eventual payment.” Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032, 1041 (Nev. 2008).

The Prompt-Payment Statute and Lien Waivers
Perhaps in response to Nevada’s liberal and remedial mechanic’s lien laws, contractors began including lien-waiver provisions in their subcontracts, in which subcontractors, to be awarded the subcontract, had to agree to forego their lien rights.

As a result, subcontractors were effectively cut off from their right to payment from the general contractor (by the pay-if-paid clause) and from the property itself (by the lien-waiver provision). That meant if a general contractor was not paid by the owner, the subcontractor was without recourse.

In response, in 2003, the Nevada legislature enacted NRS 108.2457, which declares void any contractual provision attempting to waive or impair a contractor’s lien rights. It further requires that a waiver and release of lien rights made subsequent to work being done is only valid insofar as it is accompanied by full payment of the amount identified as being waived and released.

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Additionally, in 2001, in furtherance of its effort to secure payment for contractors, the legislature enacted NRS 624.624–624.626 (“Prompt-Payment Statute”).

The Prompt-Payment Statute outlines the respective rights and duties of contractors and their subcontractors related to payment, including, without limitation, permissible time frames for payment and conditions for stopping work, withholding payment, and terminating a contract.

The Prompt-Payment Statute makes one brief mention of pay-if-paid provisions. It provides that if a contractor fails to pay its subcontractor within a certain amount of time, regardless of whether their contract contains a pay-if-paid provision, the subcontractor has a right to stop work. See NRS 624.626(1)(b).

These two statutes, taken in conjunction, prohibit any contractual provision attempting to waive or impair a contractor’s lien rights, but do not disallow pay-if-paid provisions, and instead clarify that a pay-if-paid provision does not impair a subcontractor’s right to terminate work in the absence of payment.

Lehrer McGovern Bovis v. Bullock Insulation
The Nevada Supreme Court, however, arrived at a different conclusion as to the Prompt-Payment Statute’s treatment of pay-if-paid clauses in construction contracts.

Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 185 P.3d 1055, 1064 n.33 (Nev. 2008), dealt with an issue where a subcontractor had not been paid but had executed a subcontract that included both a pay-if-paid provision and a lien-waiver provision. The subcontractor sued for payment for its work.

Even though the case was published in 2008, the statutory provisions in NRS 108.2457 prohibiting lien waivers did not apply because the subcontract at issue was executed prior to 2003. The Nevada Supreme Court therefore resorted to a public-policy analysis of the particular lien-waiver provision: “[T]he lien waiver provision applies regardless of whether [the subcontractor] received any payment. We conclude that such a provision violates public policy, as it fails to secure payment for [the subcontractor].” Thus, the subcontractor did have a right to pursue its lien claims.

The court then went on to analyze the validity of the pay-if-paid provision. In doing so, the court relied on two premises. First, the court concluded that the Prompt-Payment Statutes as enacted in 2001 rendered pay-if-paid provisions in contracts unenforceable. Second, the court concluded “[b]ecause a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed, such a provision impairs the subcontractor’s statutory right to place a mechanic’s lien on the construction project.” The Bullock Insulation Court made this determination based on a similar conclusion drawn by a California court.

Resting on these two premises and a nod to Nevada’s public policy favoring the securing of payment for labor and material

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contractors, the Bullock Insulation Court concluded that “pay-if-paid provisions are unenforceable because they violate public policy.”

However, the two premises upon which the Bullock Insulation Court relied upon are false.

First, the Prompt-Payment Statute does not render pay-if-paid clauses unenforceable. In fact, given that the only mention of pay-if-paid clauses in the Prompt-Payment Statute was in reference to a subcontractor’s right to terminate work for nonpayment, it implicitly recognized the validity of a pay-if-paid clause.

Second, the court’s reliance on California law was misplaced. In California, a pay-if-paid provision nullifies the right to bring a lien because lien rights under the California statutory scheme do not vest unless there is a right to payment, so a pay-if-paid clause in California effectively becomes a de facto lien waiver. See Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal. 4th 882, 889–90, 938 P.2d 372, 376–77 (1997) & Cal. Civ. Code § 3140 (2009).

In Nevada, unlike in California, a subcontractor’s lien rights are based on “work, materials, and equipment furnished,” and create, instead of being dependent upon, a separate right to payment. See NRS 108 (esp. § 108.222). Thus the lien right, if properly perfected, vests regardless of any pay-if-paid provision.

In fact, it would be perfectly consistent with the Nevada statutory scheme for a subcontractor to both be subject to a pay-if-paid clause and pursue its lien rights. Nothing in either the mechanic’s lien statutes or the Prompt Payment Statute says or even implies otherwise.

The Bullock Insulation Court’s reliance on these two premises to conclude that pay-if-paid provisions are invalid is therefore misplaced.

Revised Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc.
The Bullock Insulation Court subsequently withdrew its opinion and submitted a revised one.* In its revised opinion, the court made a small but significant change to a footnote of the opinion. Whereas before the footnote read that due to the Prompt Payment Statute, pay-if-paid provisions became “unenforceable,” (Bullock Insulation, n.33), the revised footnote read that due to the Prompt-Payment Statute, pay-if-paid provisions became “enforceable only in limited circumstances and are subject to the restrictions laid out in these sections.” Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032, 1042 n.50 (Nev. 2008) (hereinafter, “Bullock Insulation II”).

Although this change serves to highlight the court’s tacit recognition of the overbreadth of its previous decision, it is still too vague to be clearly understood—the Prompt-Payment Statute does not address the validity of pay-if-paid clauses and contains no restrictions that would provide any hint as to what “limited circumstances” the court contemplated. The Bullock Insulation II decision is also confusing because, despite this recognition of undefined limited circumstances in which a pay-if-paid provision may be enforceable, the court did not change the language in the body of its opinion stating that “pay-if-paid clauses are unenforceable because they violate public policy.”

What is clear is that Bullock Insulation II—by declaring that pay-if-paid clauses are unenforceable—is inconsistent with Nevada’s public policy favoring the payment of contractors who perform labor or furnish material to improve the property of the owner: whereas both the Bullock Insulation and Bullock Insulation II decisions recognized the importance of providing a contractor avenues for securing payment for its work, both decisions prefer the subcontractor over the general contractor and ignore the fact that the general contractor, too, has extended credit, invested time, labor, and materials, and has workers it has to pay.

If the result of these opinions is to invalidate pay-if-paid clauses, the Bullock Insulation courts, whether deliberately or not, have turned general contractors into de facto lenders by forcing them to pay subcontractors regardless of whether they have been paid by the owner—even though the subcontractors still have lien rights regardless of any contractual language purporting to eliminate or otherwise limit those rights.

Although future opinions will clarify the Bullock Insulation cases, the best interpretation of the Prompt-Payment Statute is that in Nevada, pay-if-paid clauses are valid and do nothing to impair a subcontractor’s right to lien the subject property. If construed in this manner, subcontractors and general contractors alike will have a right to a portion of payments made by the owner. Likewise, if the owner is not paying, both the subcontractor and general contractor will be on equal footing when pursuing their lien claims—which lien claims are not abbreviated or otherwise altered by a pay-if-paid provision.

Such an interpretation is not only equitable and fair, but it is also in line with Nevada’s public policy that promotes the securing of payment for labor and material contractors—including both subcontractors and general contractors.

*The court did not identify which changes it made in the superseding opinion, but instead explained rather nonspecifically, “a portion of our June 12, 2008, opinion could be misconstrued as being contrary to this court’s precedent. Accordingly, although we deny rehearing, we withdraw our June 12, 2008, opinion and issue this opinion in its place.” Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032, 1034 (Nev. 2008).

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