November 22, 2016

Illinois Appellate Court Provides (Another) Reason to Double-Check Your Payment Clauses

A recent ruling out of the First District Illinois Appellate Court makes one thing clear: contractors and subcontractors should pay close attention to payment clauses on all contract forms. In Beal Bank Nevada v. Northshore Center THC, LLC, et al., the Appellate Court interpreted a payment provision in a subcontract as “pay-when-paid” instead of “pay-if-paid,” making the contractor liable for failing to pay a subcontractor—even though the contractor did not receive payment from the owner. The decision shows that it’s in all parties’ best interests to ensure they fully understand the risks they face in the event of an owner’s payment default.

In Beal Bank Nevada, after paying the subcontractor’s initial invoice, the contractor refused to make payment on additional invoices due to the owner’s failure to pay. The subcontract required payment to the subcontractor “within five (5) days of receipt thereof from the Owner” and final payment “within thirty (30) days” of the owner’s payment. The circuit court interpreted the subcontract’s provision as “pay-if-paid”—in other words, the contractor’s obligation to pay the subcontractor was contingent on the owner’s payment to the contractor.

On appeal, the Appellate Court was tasked with deciding whether payment to the subcontractor was truly conditioned upon the contractor’s receipt of payment from the owner, or whether the provision merely addressed the amount and timing of payment due to the subcontractor. The Appellate Court reversed, finding no evidence of any “plain and unambiguous” language to support the notion that the subcontractor had accepted the risk of nonpayment by the owner. The Court ruled that conditions precedent—making subcontractor payment contingent on the contractor’s receipt of payment from the owner—are not generally favored, and that, in this case, the contract language did not amount to a “pay-if-paid” situation. “Without clear language indicating the parties' intent that the Subcontractor would assume the risk of non-payment by the Owner, we will not construe the challenged language in the subcontract as a condition precedent,” the Court said.

The opinion serves as an example to construction industry participants of the importance of considering the true impact of their payment provisions. Illinois courts will not consider payment to a subcontractor to be conditioned upon payment by the owner unless the parties’ agreement clearly and unambiguously demonstrates such an intent by the parties. 

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