NEVADA SUPREME COURT CLARIFIES VALIDITY OF PAY-IF-PAID PROVISIONS

On March 24, 2022 the Nevada Supreme Court issued its decision in Helix Electric of Nevada v. APCO Construction, Inc., Case No. 77320 and further expounded upon the enforceability of pay-if-paid provisions as previously address in APCO Construction, Inc. v. Zitting Brothers Construction, Inc., 473 P.3d 1021 (2020).

The Court reiterated its prior holding that pay-if-paid provisions 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 Court, however, did note that an invalid pay-if-paid provision does not necessarily invalidate other contractual conditions precedent to payment and that those conditions may prevent payment to a sub-contractor.  Additionally, the Court noted that when a contract is assigned all rights arising under that contract are likewise assigned including, potentially, the right to payment for contractually withheld retention and attorneys’ fees, therefore, a subcontractor may not be able to look to the party with whom it had a contract for payment.

In the Helix Electric case, APCO Construction served as the general contractor on a construction project in Las Vegas, NV.  APCO Construction entered into a subcontract with Helix Electric (Helix) for certain work related to the project.  The contract allowed APCO to withhold from Helix retention in the amount of 5% of all billings.  Retention was to be released pursuant to the express terms of the contract only upon the occurrence of several conditions including APCO receiving payment from the project owner, Helix completing its work on the project, the owner accepting that work and Helix delivering close-out documents and claim releases.  Ultimately, the prime contract between APCO and the owner was terminated in August 2008.  Helix 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 Helix, were left unpaid.

Among the lawsuits was one in which Helix sued APCO for work performed and accepted and unpaid retention.  At trial the district court found that the subcontractors of APCO, including Helix, had been assigned to the replacement general contractor and had continued to perform work.  Helix sought to collect retention for work performed under APCO pursuant to the subcontract in the amount of $505,021.  APCO refused to pay the retention on the basis that the conditions precedent to payment had not been met including the fact that work on the project was not complete, close out documents had not been provided or claim releases provided.  Helix argued that its contract with APCO was never officially terminated and therefore APCO remained liable for payment of withheld retention and that the conditions precedent were unenforceable because they were contained in the same portion of the contract that contained an invalid pay-if-paid provision and that under the Court’s prior ruling in Zitting Brothers Construction, conditions precedent to payment were void.  The district court held that although the pay-if-paid provision was void, the remaining conditions to payment were valid.

In reviewing the district court decision, the Nevada Supreme Court held that NRS 624.624(2)(b) explicitly allows a contractor to condition payment of retained funds upon the subcontractor supplying lien releases.  Likewise, the statute does not preclude the contractor from imposing other completion and acceptance conditions for payment. The Court further noted that such conditions went to the very purpose of retention which is to ensure completion of work by the subcontractor.  Additionally, the Court noted that the contract contained a “severability clause” such that if one provision of a contract is deemed unenforceable (such as pay-if-paid) that will not affect the enforceability of the remaining clauses in the contract. 

Likewise, the Court found that the subcontract between Helix and APCO had been assigned to the project’s new general contractor and that although Helix never signed a formal document it honored that assignment by continuing to perform work.  Since the contract was assigned to a new party all obligations and rights under that contract were likewise assigned.  As a result, Helix did not have any remaining rights to pursue against APCO since APCO was no longer a party to the contract.  This fact also worked against APCO as APCO sought a contractual award of attorneys’ fees in having had to defend the lawsuit.  The court ruled that just as Helix had to rights against APCO under the assigned contract, APCO had to rights against Helix and could not rely on the attorneys’ fees provision. In summary the case held that 1) pay-if-paid provisions are not per se invalid but will be very difficult to enforce; 2) an invalid pay-if-paid provision will not necessarily render unenforceable other conditions precedent to payment; and, 3) once a contract is assigned all rights and obligation follow the contract and may leave a subcontract without a remedy against the party it originally contracted with.

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