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 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.

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