Category: Prompt Pay Act

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.

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.