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

bjp@h2law.com 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.

Notice of Intent to Stop Work – A Remedy or an Obligation

It is often asked whether or not a contractor or supplier may stop work on a project when they have not received payment.  The general answer is “yes”, however, what steps you must take prior to stopping work is subject of debate.  On private works of improvement NRS 624.626 sets forth the grounds and procedure for stopping work when a higher-tiered contractor fails to make payment to a lower-tiered contractor.  If a higher-tiered contractor fails to timely make payment to a lower-tiered contractor, the lower-tiered contractor may stop work “until payment is received if the lower-tiered subcontractor gives written notice to the higher-tiered contractor at least 10 days before stopping work.”  If payment is received within the ten (10) day timeframe the lower-tiered contractor must resume work.

In the event that payment is not received after work is stopped, a lower-tiered contractor may terminate its contract with the higher-tiered contract “by giving written notice of the termination to the higher-tiered contractor after stopping work but at least 15 days before the termination of the agreement.”  It should be noted that you may not terminate a contract if the reason for the non-payment is due to the existence of a “pay if paid” or “pay when paid” clause.  You may, however, still stop work.  Thus, questions arise in Nevada regarding the extent to which such clauses are enforceable.

While the two provisions above appear to grant rights to unpaid contractors a closer look reveals that the provisions may actually take rights away from unpaid contractors.   As seen in the language of Nevada statutes, prior to stopping work or terminating an agreement, the unpaid contractor is required to provide written notice.  Prior to the enactment of the Nevada Prompt Pay Act, which is where the notice provisions are found, no such notice was required.  Instead, general contract law applied in that if a one party breaches a contract (i.e. – nonpayment without justification) then the other party (unpaid contractor) is relieved of their obligation to perform under the agreement.   Now, Nevada law could be read to have eliminated this remedy and require at least 25 days worth of notices prior to an unpaid contractor being permitted to terminate its contract.  To muddy the waters further, Nevada law provides:

The right of a lower-tiered subcontractor to stop work or terminate an agreement pursuant to this section is in addition to all other rights that the lower-tiered subcontractor may have at law or in equity and does not impair or affect the right of a lower-tiered subcontractor to maintain a civil action or to submit any controversy arising under the agreement to arbitration.

Thus, the law appears to impose new duties on unpaid contractors, but simultaneously appears to preserve all rights which previously existed, including the right to terminate a contract upon non-payment.  This has led to inconsistent interpretations of the law and will, eventually, have to be resolved either through the court system or further legislative action.

Nevada Private Work Prompt Pay Act – Payments from Owner to Prime (General) Contractor

As construction activity continues to increase in Nevada it is important that contractors and suppliers protect their right to payment for work and/or materials supplied to works of improvement.   There are numerous tools which can be used, one of which is the Nevada Private Work Prompt Pay Act (NRS 624.609 et seq.).  The statutes were enacted to help ensure payment to those supplying labor and material to projects in Nevada.  There are specific requirements regarding the time in which payment must be made.  If a contractor enters into an agreement with the owner of the project, then payment will be due according to the payment terms contained in that contract.  In the event the contract does not contain a schedule of payments, then payment is due within 21 days after the date the prime (general) contractor submits a request for payment.  Timelines are key and careful attention should be made to ensure that all pertinent dates are tracked.

Owners may withhold payment in certain circumstances, however, strict adherence to statutory requirements must be followed.  It is common for owners to withhold a retention amount from each payment which is due the prime contractor.  While in many jurisdictions this amount may vary, Nevada has limited the retention amount to a maximum of 5% of the payment to be made.  Any provision to the contrary is void under Nevada law.

Owners may also withhold payment for any work which has not yet been completed, unless the contract calls for such payment to be made.  Additionally, owners may withhold payment for costs and expenses reasonably necessary to correct or repair any work which is the subject of the request for payment and which is not materially in compliance with the agreement to the extent that such costs and expenses exceed 50 percent of the retention amount withheld.  As seen, tracking the amount retention held is important as Nevada law seeks to avoid any “over withholding”.  Payment may likewise be conditioned upon the receipt of releases issued by downstream subcontractors and/or suppliers.  The releases forms which should be used are set forth in related Nevada statutes and it is recommended that the statutory forms be used.

Additionally protections are also afforded contractors with regard to the type of notice which must be provided prior to payment being withheld.  Prior to withholding payment an owner must provide a written notice of its intent to withhold payment.  The notice must be:  1) written; 2) be provided on or before the date payment is due; 3) give a reasonably detailed explanation of the condition or the reason the owner will withhold payment , including, without limitation, a specific reference to the provision or section of the agreement, and any documents relating thereto, and the applicable building code, law or regulation with which the prime contractor has failed to comply; and, 4) must be signed by an authorized agent.

As noted, the amount of money subject to withholding is limited.  This has been done to avoid the the practice of withholding all money from a contractor when only a portion of the work is in dispute.  While the law concerning payments has been in force for a number of years, oftentimes owners and contractors are not aware of their rights and obligations, therefore it is critical make every effort to be aware of these important provisions.

 

Nevada Construction Law Book

NEW BOOK PROVIDES OVERVIEW OF LAWS COVERING THE CONSTRUCTION INDUSTRY IN NEVADA (TUESDAY, FEBRUARY 6, 2018)

Las Vegas, February 6, 2018: A new book providing an overview of laws and regulations governing the construction industry and design profession in Nevada is available. Nevada Construction Law is a 254-page volume co-authored by attorneys Brian Pezzillo and Jennifer Lloyd of Howard & Howard in Las Vegas.

The book is organized into 12 chapters covering a comprehensive range of the construction-related state laws, local city and county administrative codes and ordinances and interpretations of various related court rulings:

  1. Business Entity Types
  2. Licensing of Construction and Design Professionals
  3. Public Works Bidding
  4. Public Works Payment Remedies
  5. The Mechanic’s Lien in Nevada
  6. Private Works Payment Remedies
  7. Residential Construction
  8. Construction Lending
  9. Nevada Occupational Safety and Health
  10. Doing Business with Disadvantaged Enterprises
  11. Alternative Dispute Resolution

Our goal in preparing this book was to provide a one-stop, easy-to-access reference guide for any company or individual working in or providing services to the construction industry in Nevada,” said Pezzillo.
Published by ConstructionChannel.net and HLK Global Communications, the book is available at www.constructionchannel.net for $148 plus $7.45 shipping and handling.
About Howard & Howard
Founded in 1869, Howard & Howard is a full-service law firm with a national and international practice that provides legal services to businesses and business owners. The firm has offices in Michigan (Ann Arbor and Royal Oak); Illinois (Chicago and Peoria); Las Vegas, Nevada; and Los Angeles, California. Howard & Howard’s major areas of practice include: bankruptcy and creditors’ rights; business and corporate; commercial litigation; employee benefits; environmental; estate planning; franchising; intellectual property; labor, employment and immigration; mergers and acquisitions; real estate; securities; and tax. Our distinguished backgrounds provide us with a solid understanding of the industries we serve, including, automotive and industrial; cannabis; commodity futures; construction; energy and utilities; financial services; gaming; healthcare; and hospitality. For more information, please visit the firm’s website at www.howardandhoward.com.

Are Your Non-Compete Agreements Valid Under the New Law?

In the 2017 Legislative Session the Nevada Legislature passed Assembly Bill (“AB”) 276 which materially alters the manner in which restrictive covenants will be enforced in Nevada in the future.  It is is common in employment agreements, particularly those of key employees, to include a restrictive covenant which prohibits certain competitive actions on behalf of the employee after leaving or being terminated.  Employers often times use these agreements to protect themselves from employees leaving to seek employment with a competitor after they have been trained at considerable cost.  Nevada recognizes the enforceability of such agreements so long as they meet certain, specific requirements.

Under Nevada law, restrictive covenants are enforceable, provided that the terms of the covenant are reasonable.  “Reasonableness” is measured by whether an agreement imposes upon the employee any greater restraint than is reasonably necessary to protect the business and good will of the employer.  See Camco, Inc. v. Baker, 113 Nev. 512, 518, 936 P.2d 829, 833 (1997).  The time duration and geographic scope of the restriction sought to be imposed are two important factors in evaluating the reasonableness of any employment restriction.

Until the passage of AB 276, Nevada courts were not permitted to “blue pencil” employment agreements which were found to be overly restrictive.  “Blue penciling” refers to a practice of enforcing an overly broad employment agreement through the court’s striking the unenforceable clauses and/or modifying the agreement in such a way as to be enforceable.  AB 276 changed this practice and mandates that courts engage in “blue penciling”.

AB 276 specifically states that noncompetition agreements are void and unenforceable unless they are: (a) supported by “valuable consideration”; (b) do not impose greater restraint than is necessary to protect the employer; (c) “do[] not impose any undue hardship on the employee”; and (d) only impose restrictions that are appropriately related to the valuable consideration that supports the agreement.  Additionally, under A.B. 276(2) non-compete provisions cannot prohibit customers from doing business with the employee if: (a) the former employee does not solicit the customer; (b) the customer voluntarily chooses to seek out the former employee; and (c) the former employee is otherwise complying with the limitations in the non-compete agreement.

Given that AB 276 has only recently been enacted there are no cases which interpret its specific provisions, thus employers are advised to proceed with caution and to review their employment agreements carefully to ensure compliance with the new law.

Unconditional Waiver Void if Payment Fails

In September, 2016, in the case of Cashman Equipment Co. v. West Edna Assoc., et al., 132 Nev. Adv. Op. 69 (2016) the Nevada Supreme Court addressed two important issues of first impression in Nevada regarding the waiver of mechanic’s lien claims.  Plaintiff Cashman Equipment was a large material supplier who was supplying emergency back-up power generators to the new Las Vegas City Hall.  Originally, Cashman had bid the project directly to Defendant West Edna Assoc. dba Mojave Electric (“Mojave”), the electrical subcontractor; however, the City of Las Vegas required the use of Disadvantaged Business Enterprises (“DBE”) on the project and therefore Mojave inserted a DBE contractor (Cam Consulting) between itself and Cashman.  Cam did nothing other than serve as a flow-through entity that signed off on paperwork and collected a fee to make it appear that it was supplying Cashman’s equipment to the project.  Mojave insisted that payment flow through Cam to Cashman to meet its DBE obligations.  Toward the end of the project, after the generators were delivered to the Project, Mojave paid Cam in excess of $800,000, approximately $750,000 of which was owed to Cashman.  Cashman provided an unconditional lien waiver in exchange for its expected payment.  Instead of paying Cashman, the owner of Cam absconded with the funds and proceeded to divert the funds to other purposes.  Cashman asserted mechanic’s lien rights as well as payment bond rights at the time of trial.  The trial judge refused to enforce the mechanic’s lien rights on the basis that it found that the release provided by Cashman was enforceable because Mojave’s payment to Cam constituted payment to Cashman.  Likewise, the Court engaged in an equitable fault analysis regarding Cashman’s mechanic’s lien and UCC lien rights and found that Cashman was 66% as fault for its loss for not having protected itself better.  In the end the Court awarded only $197,000 to Cashman.

The Nevada Supreme Court unanimously ruled that the district court erred in finding that the waiver, even though termed “unconditional”, was enforceable against Cashman and found that payment to Cam by Mojave did not constitute payment to Cashman.  The Court likewise found that the district court erred when it failed to enforce the plain language of Nevada statutes which provide that if payment to a contractor fails to clear the bank upon which it is drawn the lien release will be deemed void.  It is not uncommon for higher-tiered contractors to hold payment unless an “unconditional release” is provided which many lower-tiered contractors and suppliers are loath to give for fear of waiving their rights if they aren’t paid.  Despite such reticence, however, many times such releases are provided in order to procure needed payment.  The Court’s decision provides much needed guidance in the area and holds district courts will be required to protect the rights of lower tiered contractors and suppliers regardless of the forms used.

Likewise, the Court noted that whether an equitable fault analysis can be used to reduce a security interest or mechanic’s lien in Nevada was a matter of first impression, and again, the Court sided with Cashman and reversed the District Court and found that “equity” may not be used and that the rights of contractors as established by the Legislature may not be restricted by the courts.  The Supreme Court reversed and remanded the matter for the sole purpose of the district court recalculating damages owed to Cashman, including attorneys’ fees.

A copy of the Court’s opinion may be seen here:  Cashman Equipment v. Mojave Electric

Mediation Held to be a Pre-condition to Litigation

On February 4, 2016 the Nevada Supreme Court ruled that mandatory mediation provisions found in contracts act as a condition precedent to the initiation of litigation.  In the case of MB America v. Alaska Pacific Leasing Co., 132 Nev. Adv. Op. 8 (Feb. 4 2016) the Supreme Court of Nevada upheld a district court’s granting of summary judgment when Plaintiff MB initiated litigation without having first fulfilled its duty to submit the dispute to mandatory mediation.   Likewise, the Supreme Court upheld an award of attorneys’ fees to Defendant Alaska Pacific.

Plaintiff MB argued that it had discussed mediation informally with Alaska Pacific, however, the Supreme Court found that this did not meet the requirements of the contract and because Alaska Pacific had not expressly rejected mediation, Plaintiff MB was under an obligation to fulfill the mediation requirement.  The Court likewise rejected the argument that the district court matter should be stayed pending compliance with the mediation requirement, which would be typical when dealing with arbitration provisions.

Parties and their attorneys would do well in future proceedings to strictly comply with any mediation provisions contained in their agreement and memorialize such compliance in the event that it becomes necessary to establish that all “conditions precedent” to litigation have been fulfilled.

Attorneys’ Fees Mandatory When Lien is Expunged

Expunged lien results in attorneys’ fee award

On July 13, 2016 the Nevada Court of Appeals issued an unpublished decision which squarely addressed the issue of the award of attorney’s fees when dealing with motions to expunge mechanic’s liens.  The facts of the case were simple in that the District Court granted a motion to expunge a mechanic’s lien, which,  per Nevada statutes results in a mandatory award of attorneys fees to the moving party.  The District Court denied the request for attorneys’ fees stating that it had not found that the mechanic’s lien claim had been “frivolous”.  The Appellate Court reversed this decision and found that the statute governing expungement of mechanic’s liens (NRS 108.2275) provided for only three possible outcomes:

“First, if the court finds that “[t.]he notice of lien is frivolous and was made without reasonable cause, the court shall make an order releasing the lien and awarding costs and reasonable attorney’s fees to the applicant for bringing the motion.” NRS 108.2275(6)(a.). Second, if the court finds that “[t]he amount of the notice of lien is excessive, the court may make an order reducing the notice of lien to an amount deemed appropriate by the court and awarding costs and reasonable attorney’s fees to the applicant for bringing the motion.” NRS 108.2275(6)(b). And third, if the court finds that “[t]he notice of lien is not frivolous a~d was made with reasonable cause or that the amount of the lien is not excessive, the court shall make an order awarding costs and reasonable attorney’s fees to the lien claimant for defending the motion.”

The matter was reversed and remanded to the district court for further proceedings to address the issuance of attorneys’ fees.

The case may be found at:  One Trop LLC v. Verma