March 20, 2006

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U.S. Court of Appeals, 10th Circuit

MidAmerica Construction Management, Inc. v. MasTec North America, Inc., and Renegade of Idaho, Inc.

No. 04-6231
February 8, 2006

When the project owner PathNet Inc. filed for bankruptcy, subcontractor MidAmerica Construction of Oklahoma sued contractors Mastec North America of Florida and Renegade of Idaho Inc. to get paid for work it had performed. The courts, however, determined that a “pay-if-paid” clause, under Texas and New Mexico law, meant that the contractors did not have to pay MidAmerica if they themselves had not been paid by PathNet.

PathNet hired Renegade to help build the New Mexico and Texas portions of a fiber optic network. MasTec subsequently purchased Renegade. The defendants hired MidAmerica for work performed in January and February of 2001 and made an initial $127,000 payment to MidAmerica in March 2001. PathNet filed for bankruptcy in April 2001 and MasTec refused to make any further payments to MidAmerica, asserting it had not received payment from PathNet for the work MidAmerica had performed. MidAmerica sued the defendants in U.S. District Court for the Western District of Oklahoma for $1.9 million.

The district court denied MidAmerica’s motion for partial summary judgment and granted the defendants’ counter-motion for summary judgment, holding that a provision in the subcontract provided that “all payments to the subcontractor by the contractor are expressly contingent upon and subject to receipt of payment for the work by contractor from owner.” The court said that unless or until PathNet paid the defendants, they had no obligation to pay the plaintiff. It also found that a termination clause in the subcontract barred MidAmerica’s claims for breach of contract.

The appeals court affirmed the district court’s summary judgment. It concluded that the “pay-if-paid” clause is enforceable under both Texas and New Mexico law, “making PathNet’s payment of defendants a condition precedent to defendants’ obligation to pay plaintiff.” The appeals court noted that construction contracts often contain provisions such as “pay-when-paid” and “pay-if-paid,” but said they refer to distinct types of contractual clauses. The appeals court said that a typical “pay-when-paid” clause might read: “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.’” Such a clause, it said, “does not create a condition precedent to the obligation to ever make payment and it does not expressly shift the risk of the owner’s nonpayment to the subcontractor.” However, a typical “pay-if-paid” clause might read: “Contractors’ receipt of payment from the owners is a condition precedent to the contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and subcontract price includes this risk.”

The subcontract contained the necessary language to make PathNet’s payment to defendants a condition to their obligation to pay MidAmerica. And although the supreme courts of both states had not definitively determined where to draw the line between “pay-if-paid” and “pay-when-paid,” the U.S. appeals court determined it appears that case law in both states would interpret “pay-if-paid” as an enforceable clause.

Case participants: Albert W. Murry (Murry Cox & Murry) for plaintiff-appellant.

Henry D. Hoss (McAfee & Taft) for defendants-appellees.

Before: Judges Ebel, Tymkovich and Browning.

Opinion By: Judge Ebel.

Decision: Affirmed.