Tymeless Flooring, Inc. v. Rotolo Consultants, Inc.

172 So.3d 145

TYMELESS FLOORING, INC.

v.ROTOLO CONSULTANTS, INC. and Fidelity Deposit Company of Maryland.

No. 2014–CA–1392.

Court of Appeal of Louisiana, Fourth Circuit.

May 20, 2015.

Wayne J. Jablonowski, Law Office of Wayne J. Jablonowski, APLC, Slidell, LA, for Plaintiff/Appellant.

John R. Walker, Bailey D. Morse, Jones, Fussell, L.L.P., Covington, LA, for Defendant/Appellee.

(Court composed of Chief Judge JAMES F. McKAY, III, Judge DANIEL L. DYSART, Judge ROSEMARY LEDET ).

Opinion

ROSEMARY LEDET, Judge.

This is a breach of contract suit. The narrow issue presented is whether the payment provision in the construction contract between the parties is a “pay-when-paid” clause—a term of payment—or a “pay-if-paid” clause—a suspensive condition.¹ The trial court, finding that the contract contained a suspensive condition, sustained the dilatory exception of prematurity filed by the defendant, Rotolo Consultants, Inc. (“RCI”), and dismissed without prejudice the suit filed by the plaintiff, Tymeless Flooring, Inc. (“Tymeless”). From this judgment, Tymeless appeals. For the reasons that follow, we find that the contract contains a term of payment—a “pay-when-paid” clause. Accordingly, we reverse and remand.

FACTUAL AND PROCEDURAL BACKGROUND ²

This case arises out of a construction contract between Dryades Young Men's Christian Association (“Dryades”) and Ellis Construction, Inc. (“Ellis”), the prime contractor, for a project known as the Dryades YMCA Natatorium and Wellness Center in New Orleans, Louisiana (the “Project”). After contracting with Dryades, Ellis entered into a subcontract with RCI for certain portions of the work on the Project. RCI, in turn, entered into a subcontract with Tymeless to perform additional work, as an extra to the contract (the “Subcontract”). Tymeless was thus a subcontractor of a subcontractor on the Project.

After fully performing the work under the Subcontract, Tymeless invoiced RCI. Although RCI made a partial payment, it failed, despite amicable demand, to make full payment. On November 16, 2012, Tymeless filed a Statement of Claim and Privilege with the Orleans Parish Recorder of Mortgages in the principal amount of $24,595.00. On November 15, 2013, Tymeless commenced this suit against RCI.³ In its petition, Tymeless alleged that RCI was liable to it for the full amount of its lien claim, plus interest, attorneys' fees, and costs. In support of its claim, Tymeless cited the Subcontract; the Private Works Act, La. R.S. 9:4801, et seq; and the Open Account statute, La. R.S. 9:2781.

In response, RCI filed a dilatory exception of prematurity. The sole basis for RCI's exception was the payment provision contained in Section 5 of the Subcontract,⁴ which provides as follows:

Payments are to be made as follows: 90% of Sub–Contractor's approved invoices or pay request will be paid subject to the conditions following, after payment by the Owner for Sub–Contractor's work. Retention of 10% will be released upon satisfactory completion of this contract and release of final payment by the Owner.⁵

RCI's position was that the underlying proceeding is premature because the payment provisions contained in the contract have not been triggered. Stated otherwise, RCI's position was that the Subcontract specified that the amounts Tymeless was seeking to recover from RCI were not owed by RCI “unless and until” RCI itself was paid by Ellis. Given that Ellis had not yet paid RCI these amounts, RCI contended that Tymeless' suit to secure payment from RCI was premature.

Agreeing with RCI, the trial court granted RCI's exception of prematurity and dismissed Tymeless' suit without prejudice. Tymeless then filed a motion for new trial, which the trial court summarily denied. This appeal followed.

DISCUSSION

An exception of prematurity poses the question of “whether the cause of action has matured to the point where it is ripe for a decision by the court.”

1 Frank L. Maraist and Harry T. Lemmon, LOUISIANA CIVIL LAW TREATISE: CIVIL PROCEDURE § 6.6 (1999). An exception of prematurity is governed by La. C.C.P. art. 423, which sets forth the following pertinent rules:

• When the obligation allows a term for its performance, the right to enforce it does not accrue until the term has elapsed.

• If the obligation depends upon a suspensive condition,⁶ the right to enforce it does not accrue until the occurrence or performance of the condition.

• When an action is brought on an obligation before the right to enforce it has accrued, the action shall be dismissed as premature, but it may be brought again after this right has accrued.

La. C.C.P. art. 423.

In this case, the dispositive facts are not disputed. The only dispute presented is a legal one. When, as in this case, “there is no dispute as to the dispositive facts, the issue can be decided as a matter of law and the review is de novo. ” Demma v. Automobile Club Inter–Insurance Exch., 08–2810, p. 7, n. 4 (La.6 26/09), 15 So.3d 95, 100 (citing Kevin Associates, L.L.C. v. Crawford, 03–0211, p. 15 (La.1/30/04), 865 So.2d 34, 43 ).

The narrow legal issue presented in this case is whether, under the provisions of the Subcontract, the non-payment by Ellis (a primary contractor) to RCI (a subcontractor) is a suspensive condition—a “pay-if-paid” clause—to RCI's obligation to pay Tymeless (RCI's subcontractor). If so, then, as RCI contends and the trial court found, Tymeless' suit is premature. If not, then, as Tymeless contends, the provision is a term of payment—a “pay-when-paid” clause—and the trial court erred in granting the exception of prematurity and dismissing the suit.⁷

In order to provide a framework for addressing the issue, we first summarize the jurisprudence distinguishing two types of payment clauses commonly inserted into construction contracts—“pay-when-paid” and “pay-if-paid” clauses. “The difference between a ‘pay-when-paid’ clause and a ‘pay-if-paid’ clause is vast.” BMD Contractors, Inc. v. Fidelity and Deposit Co. of Maryland, 828 F.Supp.2d 978, 985 (S.D.Ind.2011).⁸

Explaining the vast difference between these two type of clauses, a commentator notes:

A “pay-when-paid” clause governs the timing within which a general contractor must remit payment to its subcontractor, linking the general contractor's receipt of payment from the owner to the general contractor's payment to the subcontractor. Under this type of provision, the general contractor must make payment to the subcontractor within a reasonable time, even if the general contractor does not receive payment from the owner.

The more restrictive “pay-if-paid” clause, however, does not govern the timing of a general contractor's payment obligation, but rather dictates whether such payment obligations exist at all.

Where there is a valid “pay-if-paid” provision in the contract, the general contractor is only required to pay the subcontractor if and to the extent that it receives payment from the owner for the subcontractor's work. Thus, under a “pay-if-paid” provision, there is a transfer of risk of the owner's nonpayment from the general contractor to the subcontractor.

Ronald P. Friedberg, “PAY–IF–PAID” CONTRACT PROVISIONS, Providing Some Enforcement Consistency and Predictability in an Unsettled Area of Law, 57 No. 2 DRI For Def. 23 (2015).

A “pay-when-paid” clause is susceptible to the following two interpretations: “(1) as setting a condition precedent to payment or (2) as fixing the point in time when payment would ordinarily occur.” Evans, Mechwart, Hambleton & Tilton, Inc. v. Triad Architects, Ltd., 196 Ohio App.3d 784, 794, 965 N.E.2d 1007, 1014 (2011). The majority view nationwide is that “pay-when-paid” clauses are timing mechanisms, not condition precedents. William M. Hill, Mary–Beth McCormack, Pay–If–Paid Clauses: Freedom of Contract or Protecting the Subcontractor from Itself?, 31 Construction Law. 26 (Winter 2011). Explaining the rationale behind the majority view, a commentator notes:

At first glance, a logical conclusion from [the “pay-when-paid” clause] language is that if the contractor does not receive payment from the owner, the contractor's obligation to pay the subcontractor never ripens. The majority of courts, however, refuse to literally enforce pay-when-paid clauses. Instead, the majority of courts construe pay-when-paid provisions as “timing” provisions, requiring payment from the general contractor to the subcontractor in a reasonable time after the work is performed, regardless of when the general contractor receives payment from the owner. In short, courts refuse to permit the shift of risk of the owner's lack of payment from the general contractor to the subcontractor based on pay-when-paid provisions. As rationale, courts usually point to the harsh effects of conditions precedent, and a general policy of avoiding them if another reasonable reading of a contract is possible.

But most courts adopting this interpretation of pay-when-paid clauses leave open the possibility of enforcing these provisions when the language clearly and unequivocally shifts the owner's credit risk from the general contractor to the subcontractor. The magic language for creating an enforceable condition precedent is usually words like “on condition that,” “if,” “provided that,” or by “some other phrase that conditions performance.” Clauses that attempt to capture this explicit language are typically referred to as pay-if-paid clauses.

Id. at 26–27. “Courts that have enforced such [“pay-if-paid”] provisions uphold the parties' freedom to contract in such a way that those least able to control or minimize the risk are nevertheless the ones most likely to suffer the consequences of its realization.” 3 Bruner & O'Connor, CONSTRUCTION LAW § 8:47 (2014).

The seminal nationwide case on “pay-when-paid” clauses is Thos. J. Dyer Co. v. Bishop Intern. Engineering Co., 303 F.2d 655 (6th Cir.1962), which espouses the majority view outlined above. The subcontract in Dyer provided that “no part of [the subcontract price] ......