Last, week, the Maryland Appellate Court decided Patriot Construction, LLC v. VK Electrical Services, LLC. The case involved a subcontract between Patriot and VKES for electrical work on an NSA project, including an important notice, pay-when-paid provision, and additional ticket work that Patriot did not authorize in writing. So the opinion raises some intersteting issues about whether a part will be bound to a contract when it makes agreements outside of the written language of a pay-when-paid contract.
Facts of Patriot Construction, LLC v. VK Electrical Services, LLC
Patriot had a contract with the Maryland Procurement Office of the National Security Agency to provide general contractor services for a project at Fort Meade in Anne Arundel County. Patriot subcontracted VKES to perform electrical work for $495,000. The subcontract stated that no changes could be made without written approval from Patriot. The subcontract also included a “pay-when-paid provision.” I’ll explain what a pay-when-paid provision is in a moment.
As work on the project progressed, Patriot requested additional work from VKES, which increased invoiced services by $366,428.09. VKES completed its work on the project in July 2016 and asked for payment, but Patriot’s payment from the MPO was a condition precedent to pay subcontractors. Patriot received payment from the MPO in October 2019, and in April 2020, Patriot informed VKES that it would not pay for additional ticket work that had not been authorized in writing.
Bench Trial Awared $64,577.15
Ultimately, Patriot paid VKES a total of $796,853 but declined to pay the invoice for additional ticket work in the amount of $64,577.15. VKES filed a breach of contract lawsuit against Patriot for refusing to pay for completed subcontract work. They agreed to a bench trial and an Anne Arundel County judge awarded $64,575.09. Patriot appealed, claiming that VKES did not meet the condition precedent, that the claims were barred by the statute of limitations, and other reasons.
Condition Precedent Not Met Argument
The Maryland Appellate Court first tacked Patriot Construction argument that VKES failed to meet a condition precedent to receive payment for additional work because VKES did not have written authorization to perform “ticket work” outside of the original subcontract. VKES did not dispute this. But it argued that Patriot waived the condition precedent through its representative’s actions. The court found that the representative acted with apparent authority, and that the written authorization requirement was waived by Patriot’s conduct.
What Is a Condition Precedent?
Under Maryland law, a condition precedent is a requirement that must be fulfilled before a party is obligated to perform their contractual duties. In other words, it is a condition that must be satisfied before the contract becomes effective or before a party is required to perform their obligations under the contract.
How Can You Waive a Condition Precedent?
A waiver of a condition precedent is an agreement between parties to a contract where they decide to proceed with the contract without the fulfillment of a certain condition. If the parties agree to waive the condition precedent, then the party whose performance was contingent on the condition precedent will be obligated to perform their duties regardless of whether the condition precedent was met or not.
The waiver can be explicit, such as a written agreement or oral statement, or implied through the conduct of the parties. A Maryland court will consider the totality of the parties’ actions when determining whether there was a waiver of a condition precedent.
Court’s Ruling on Whether There Was a Waiver?
The trial court found that Patriot had waived the condition precedent, and the appeals court agreed. The court pointed to evidence presented showed that Patriot’s representative approached VKES about putting in a bid for the electrical work on the project, negotiated the terms of the subcontract, and directed VKES to perform the additional work. Patriot assured VKES that it would submit the ticket work invoice to the MPO and pay for the work.
So the representative had at least apparent authority to direct VKES to perform work outside the subcontract in the absence of written authorization, and Patriot’s conduct waived the requirement for written authorization. Therefore, the court found that the condition precedent in the subcontract was not a bar to VKES’s recovery of damages.
Statute of Limitations Defense
The court next address Patriot’s contention that trial court erred in concluding that the lawsuit filed against it was not barred by the three-year statute of limitations. Patriot argued that the statute of limitations began to run when VKES completed its work in July 2016. The breach of contact lawsuit was filed in June 2020 was filed too late, more than three years after the statute of limitations.
Under Maryland law, a civil action must be filed within three years from the date it accrues, unless another provision of the Code provides otherwise. The party raising a statute of limitations defense has the burden of proving that the cause of action accrued prior to the statutory time limit for filing the suit. The test for determining the accrual date of a cause of action is to ascertain the time when the complaining party could have first maintained the action to a successful result. In contract actions, a cause of action for breach of contract accrues when the contract is breached, and when the breach was or should have been discovered.
VKES’s defense? It claimed that the statute of limitations did not begin to run until sometime in late 2019 when the Maryland Port Administration (“MPO”) paid Patriot. So, the argument goes, the running the three-year statute of limitations from the date VKES’s work was complete is inconsistent with the pay-when-paid clause of the contract. Getting back to condition precedents, VKES contended that the pay-when-paid provision of the contract was a condition precedent to VKES’s ability to seek payment, and the statute of limitations did not begin to run until that condition was satisfied.
The appelleate court found that the pay-when-paid provision of the contract was a condition precedent to VKES’s ability to seek payment, and the statute of limitations did not begin to run until that condition was satisfied. Consequently, the trial court properly found that the statute of limitations did not bar VKES’s lawsuit against Patriot.
What Is a Pay-When-Paid Provision?
Construction projects like this NSA job involve a complex network of contractual relationships between numerous people and organizations. The owner of the project usually contracts with an architect and a general contractor, who then hire subcontractors and consultants for specific portions of the project. The architect and GC act as intermediaries between the owner and their teams. However, one risk associated with construction projects is the owner not paying.
To protect themselves, the architects and GCs often include a “pay-if-paid” or “pay-when-paid” clause in their subcontracts, making the owner’s payment a condition precedent for them to pay their subcontractors, even if the work has been completed. So a pay-when-paid provision is a contract clause that makes payment to a subcontractor dependent on the contractor’s receipt of payment from the owner or client. In other words, the subcontractor will only be paid once the main contractor has been paid by the client. In this case, that meant that meant Patriot’s payment from the MPO was necessary before paying subcontractors like VKES.
This provision is often used in construction contracts to shift the risk of non-payment from the main contractor to the subcontractor. It means that if the owner or client doesn’t pay the contractor, the subcontractor may not receive payment either.
A pay-when-paid provision can have a negative impact on a subcontractor’s cash flow because it delays payment until the contractor receives payment from the owner or client. This means that subcontractors may have to wait a long time for payment, and they may not have the funds to cover their own expenses in the meantime.
However, some argue that pay-when-paid provisions can help subcontractors in the long run by shifting the risk of non-payment from the subcontractor to the contractor. If the owner or client fails to pay the contractor, the contractor may not have the funds to pay the subcontractor. In this case, the pay-when-paid provision protects the subcontractor from non-payment and potentially losing the money they have already spent on the project.
Ultimately, whether a pay-when-paid provision helps or hurts a subcontractor’s cash flow depends on the specific circumstances of the project and the payment terms of the contract.
- Young Electrical Contractors v. Dustin Construction (2018): Maryland Supreme Court The Court of Appeals of Maryland reviewed the law concerning “pay-when-paid” and “pay-if-paid” clauses in construction subcontracts in Montgomery County. The case involved a subcontractor suing a general contractor for payment on a subcontract, with the subcontract containing a provision that payment was contingent upon the contractor’s receipt of payment from the owner. The court considered whether the contractor was entitled to summary judgment but ultimately remanded the case to the circuit court for further factual development necessary to determine whether the clause at issue was a pay-when-paid or pay-if-paid provision.
- Atl. States Const. Co. v. Drummond & Co.(1968). Conditional payment provisions should be interpreted as pay-when-paid clauses, unless the language in the contract explicitly indicates otherwise.