Pay-if-Paid Clauses are Unenforceable in Nevada
Many subcontracts submitted to subcontractors by general contractors (“GC”) contain so-called ‘pay-if- paid’ clauses, which essentially tell the subcontractor that he will get paid by the GC only after the GC has been paid by the project owner for the work performed by the subcontractor. The Nevada Supreme Court addressed this issue in the case of Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 197 P.3d 1032 (2008). The case arose out of a major construction project on the Las Vegas Strip, where Lehrer McGovern Bovis was the GC and Bullock Insulation one of its subcontractors. The contract between them contained both a mechanic’s lien waiver clause and a pay-if-paid clause. The Court upheld the trial court’s ruling that the particular lien waiver clause of the contract was unenforceable, but noted in a footnote that each such clause needs to be evaluated on whether it violates public policy.
Concerning the ‘pay-as-paid clause, the Court was less equivocal and held:
At the time the parties entered into the agreement and subcontract, the Legislature had not yet proclaimed pay-if-paid provisions unenforceable,50 and this court had not previously addressed the enforceability of such provisions. Because a pay-if-paid provision limits a subcontractor’s ability to be paid for work already performed, such a provision impairs the subcontractor’s statutory right to place a mechanic’s lien on the construction project.51 As noted above, Nevada’s public policy favors securing payment for labor and material contractors.52 Therefore, we conclude that pay-if-paid *1118 provisions are unenforceable because they violate public policy. Accordingly, we affirm the portion of the district court’s judgment concluding that the pay-if-paid provision of the subcontract was unenforceable.
As noted by the court in the Lehrer McGovern case, the Nevada legislature indirectly addressed pay-if-paid clauses in enacting a so-called prompt payment statute, NRS 624.624, which states in relevant parts:
Effective: January 1, 2016
1. Except as otherwise provided in this section, if a higher-tiered contractor enters into:
(a) A written agreement with a lower-tiered subcontractor that includes a schedule for payments, the higher-tiered contractor shall pay the lower-tiered subcontractor:
(1) On or before the date payment is due; or
(2) Within 10 days after the date the higher-tiered contractor receives payment for all or a portion of the work, materials or equipment described in a request for payment submitted by the lower-tiered subcontractor, whichever is earlier.
(b) A written agreement with a lower-tiered subcontractor that does not contain a schedule for payments, or an agreement that is oral, the higher-tiered contractor shall pay the lower-tiered subcontractor:
(1) Within 30 days after the date the lower-tiered subcontractor submits a request for payment; or
(2) Within 10 days after the date the higher-tiered contractor receives payment for all or a portion of the work, labor, materials, equipment or services described in a request for payment submitted by the lower-tiered subcontractor, whichever is earlier.
Of course, the GC can withhold all or parts of the payment if certain conditions, delineated in NRS 624.624.2 through 5 are met. However, this statute specifically must be paid within the contractual time frame, whether the GC has been paid by the owner or not.