Violation of covenant of good faith and fair dealing when relying on "pay if paid" clause to avoid payment to subcontractor.
This case addresses “Pay-if-Paid” clauses. Such clauses are sometimes included in subcontracts and state that a general contractor has no duty to pay a subcontractor until the general contractor has been paid by the owner for the work performed by the subcontractor. In this matter, the general contractor claimed that it was not paid in full by the owner and that is why it did not make payment to the subcontractor. However, the short payment that was made by the owner was only made after a payment dispute between the general contractor and owner was settled. The general contractor argued that the owner did not designate a portion of the settlement funds for disbursement to the subcontractor. The court held that the general contractor “could not enter into a settlement with the owner that did not designate a portion of the settlement funds for disbursement to a subcontractor, and then rely on the ‘pay if paid’ clause to defeat the subcontractor’s right to payment,” which was a violation of the covenant of good-faith and fair-dealing.
Case Law Alert - 1st Qtr 2011