Nevada Supreme Court Rules on Validity of Pay-if-Paid Clauses

On October 8, 2020 the Nevada Supreme Court issued its decision in APCO Construction, Inc. v. Zitting Brothers Construction, Inc., Case No. 75197 and addressed the enforceability of pay-if-paid provisions in construction contracts.  In short, the Court held that pay-if-paid provision are not per se void in Nevada, however, such provisions will be deemed void if they require subcontractors to waive their rights under Nevada statutes requiring prompt payment or if they relieve general contractors from their obligations or liabilities under Nevada’s prompt payment statutes.  The practical effect of this ruling is to make enforcement of pay-if-paid provisions difficult and limits their applicability to very narrow circumstances which must be evaluated on a case by case basis.  Thus, general contractors should be cautious in relying on the validity of such provisions given their very narrow application and should take great care in drafting such provisions in any construction agreement.

In the APCO Construction case, APCO Construction served as the general contractor on a construction project in Las Vegas, NV.  APCO Construction entered into a subcontract with Zitting Brother Construction (Zitting) for certain work related to the project.  The contract required APCO to pay Zitting 100%  of work completed during the prior month (less retention) within 15 days of APCO receiving payment from the project owner.  Payment to Zitting was conditioned on APCO receiving payment from the owner.  This condition precedent also applied if the prime contract between APCO and the owner was terminated, thereby conditioning final payment to Zitting on APCO actually receiving final payment from the owner.  Ultimately, the prime contract between APCO and the owner was terminated in August 2008.  Zitting continued to do work for a new general contractor until December 2008 when the project ultimately failed, and all work ceased.  As a result of the project’s failure multiple lawsuits were filed and numerous contractors, including APCO and Zitting, were left unpaid.

Among the lawsuits was one in which Zitting sued APCO for work performed and accepted, unpaid retention and unpaid change orders.  In part, APCO raised the defense that the pay-if-paid provision of the contract meant that Zitting was not entitled to seeks damages from APCO because APCO had not been paid by the owner.  The district court granted partial summary judgment in favor of Zitting and found that pay-if-paid provisions were void and unenforceable under Nevada law. 

In reviewing the district court decision, the Nevada Supreme Court held that NRS 624.628(3) protects subcontractors’ rights by rendering void and unenforceable any agreement that requires a lower-tiered subcontractor to waive any rights provided by NRS 624.624 to 624.630, relieves a higher-tiered contractor of any obligation or liability imposed by NRS 624.624 to 624.630 or requires a lower-tiered subcontractor to waive, release or extinguish a claim or right for damages or an extension of time . . .  One of the rights protected is a subcontractor’s right to prompt payment as provided by NRS 624.624.[1]  In evaluating the specific terms of the contract at issue the Nevada Supreme Court held that the district court erred in concluding that all pay-if-paid provisions are void on their face, but did uphold the summary judgment and award of damages.  The Supreme Court found that the contract contained a schedule of payments that required payment to Zitting within 15 days of APCO receiving payment from the owner.  APCO argued that payment from the owner was a condition precedent to Zitting being entitled to payment.  This condition precedent prevented payment from ever being made to Zitting for work that was performed and accepted and for which payment would otherwise be due and owing.  The Nevada Supreme Court found that this violated Zitting’s right to prompt payment under NRS 624.624(1)(a).  Thus, although the parties agreed to the condition precedent in their written contract, the Nevada Supreme Court found the provision void as it interfered with payment rights guaranteed under Nevada law.

This raises the question of when a pay-if-paid provision will be enforced.  In citing to an unpublished decision (Padilla Const. Co. of Nev. v. Big-D Constr. Corp, (Case Nos. 67397 & 68683 (Order of Affirmance, Nov. 18, 2016)), the Nevada Supreme Court noted that if a subcontractor’s work is not accepted because it is defective and the owner withholds payment from the general contractor the general contractor may enforce a pay-if-provision.  The basis for this decision was that the work of the subcontractor was never accepted and therefore payment never became due.  This appears to be a very narrow exception to what should be interpreted as a broad public policy against pay-if-paid provisions. 

If you have questions about how this applies to you or your business, please contact us:

Brian J. Pezzillo, Esq., CIPP/E, CIPM

3800 Howard Hughes Pkwy., Ste. 1000

Las Vegas, NV 89169 702.667.4839

[1] NRS 624.624(1) states that if a written agreement contains a schedule of payments the higher-tiered contractor must pay the lower-tiered subcontractor: 1) on or before the date payment is due; or, 2) within 10 days of which the higher-tiered contractor receives payment – whichever is earlier.  NRS 624.624(1)(b) provides that if a written agreement contains no schedule for payment then the lower-tiered contractor must be paid within 30 days of submitting a payment request or 10 days of when the higher-tiered contractor receives payment – whichever is earlier.

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