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.

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.

 

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.