Many construction subcontracts contain so-called “pay-if-paid” clauses by which the higher-tiered contractor seeks to protect itself from claims by lower-tiered contractors, when the higher-tiered contractor has not been paid by the project owner for whatever reason. Such a clause typically reads like this:

Receipt of payment by the Contractor from the Owner for the Subcontract Work is a condition precedent to payment by the Contractor to the Subcontractor.  The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor, for payment of Subcontract Work.

For clarification, “pay-if-paid” clauses need to be distinguished from “pay-when-paid” clauses. Both are so-called “contingent clauses”, making payment contingent on another event, the higher-tiered contractor getting paid. But in the case of “pay-when-paid” clauses, payment to the lower-tiered contractor is merely delayed. It doesn’t extinguish the higher-tiered contractor’s obligation to pay the subcontractor. In “pay-if-paid” situations, the lower-tiered contractor bears the risk of owner or prime contractor nonpayment. This article will specifically address the enforceability of “pay-if-paid” clauses in construction contracts in Nevada.

Pay-if Paid Clauses Are Disfavored in Nevada but Can Be Enforced in Certain Circumstances

Nevada’s approach to “pay-if-paid” clauses is in line with multiple other states disfavoring such clauses, states like California and Utah. The Nevada Supreme Court addressed the issue in the case of Lehrer McGovern Bovis v. Bullock Insulation, 124 Nev. 1102 (Nev. 2008), 197 P.3d 1032). The contract containing the clause was signed before the Nevada legislature amended the Nevada contractor’s licensing statute (NRS 624) to include a prompt payment provision. (See below). The trial court had ruled that the pay-if-paid provision of the subcontract was unenforceable based upon public policy concerns with the impact of such clauses on the statutory right to a mechanic’s lien. In affirming the trial court’s ruling, the Supreme Court noted that Nevada’s public policy favors securing payments for labor and materials contractors and then ruled that indeed pay-if-paid clauses are unenforceable because they violate public policy.

The Nevada Supreme Court re-addressed this issue a few months ago in APCO Constr., Inc. v. Zitting Bros. Constr., Inc., 136 Nev., Advance Opinion 64 (Nev. Oct. 8, 2020), stating that they were taking “this opportunity to clarify that pay-if-paid provisions are not per se void and unenforceable in Nevada.” In the case, Zitting’s subcontract with general contractor APCO contained a pay-if-paid clause and several conditions precedents for Zitting getting paid the retention amount. When the project ultimately failed, APCO, Zitting and other subcontractors went unpaid, and Zitting then sued APCO and the owner for, among others, breach of contract and foreclosure of a mechanic’s lien. The lower court ultimately found in favor of Zitting against APCO, and APCO appealed.

On appeal, APCO argued that the pay-if-paid provision of the contract should be enforced. In analyzing that contention, the Court noted that the Nevada legislature had passed a so-called “prompt payment statute” (NRS 624.624-630), which delineates the payment of subcontractors by higher-tiered contractors on Nevada construction projects, and whose provisions void pay-if-paid clauses and make them unenforceable. On that point, NRS 624.628(3) states:

 “A condition, stipulation or provision in an agreement which:(a) Requires a lower-tiered subcontractor to waive any rights provided in NRS 624.624 to 624.630, inclusive, or which limits those rights;(b) Relieves a higher-tiered contractor of any obligation or liability imposed pursuant to NRS 624.624 to 624.630, inclusive; or(c) Requires a lower-tiered subcontractor to waive, release or extinguish a claim or right for damages or an extension of time that the lower-tiered subcontractor may otherwise possess or acquire as a result of delay, acceleration, disruption or an impact event that is unreasonable under the circumstances, that was not within the contemplation of the parties at the time the agreement was entered into, or for which the lower-tiered subcontractor is not responsible, is against public policy and is void and unenforceable.”

The Court concluded that “Nevada’s prompt payment statute thus clearly sets out for subcontractors to be paid in a timely manner” and that if pay-if-paid clauses violate the statutory provisions, they are unenforceable, and the Court reiterated that the same reasoning applied to Nevada’s mechanic’s lien statute, as decided in the Lehrer McGovern Bovis case. It then summarized its ruling thus:

“To resolve any confusion that parties may still have on the enforceability of pay-if-paid provisions in Nevada, we clarify today that pay-if-paid provisions entered subsequent to the Legislature’s 2001 amendments are not per se void and unenforceable. Rather, such provisions require a case-by-case analysis to determine whether they are permissible under NRS 624.628(3), and we hold that they are unenforceable if they require any subcontractor to waive or limit its rights provided under NRS 624.624-.630, relieve general contractors of their obligations or liabilities under NRS 624.624-.630, or require subcontractors to waive their rights to damages or time extensions. The district court therefore erred in outright concluding that pay-if-paid provisions are void and unenforceable without considering the specific contract terms and whether the provisions were permitted under statute.”

The weakness of the APCO Constr. holding is that it does not specify which, if any, pay-if-paid clauses in a Nevada subcontract would be acceptable or enforceable. If those clauses cannot violate the mechanic’s lien statute and the prompt payment statute, then how can they be phrased so as not to violate those statutes? Commentators on the APCO Construction case have suggested that pay-if-paid clauses can be enforced if the subcontractor somehow fails to comply with the specific requirements of the prompt payment statute or the mechanic’s lien statute and thereby cannot use those provisions to overcome the pay-if-paid clause. Such arguments would likely fail because the basic statutory obligation of the subcontractor is to submit an invoice for payment.  The Nevada Supreme Court’s attempted clarification seems in actuality to create more confusion by stating that pay-if-paid clauses may be lawful in some unknown circumstance on a case-by-case basis.