“Pay If Paid” Provision in General Contractor/Project Manager’s Contract with Subcontractor Upheld in Face of Claims of Fraudulent Concealment of Financial Status of Project Owner

In Walbridge Aldinger v. Iafrate Constr., et al.07.25.2013, the Michigan Court of Appeals upheld a “pay if paid” provision in the contractual agreement between the general contractor and project manager and a subcontractor.  Anticipating the pending difficulties with its subcontractors in light of the financial status of the project owner, the general contractor filed a declaratory judgment action in Oakland County, Michigan seeking a declaration concerning its liability to subcontractors under the contract, which contained a “pay if paid” provision – essentially guaranteeing payment to the subcontractors only if the general contractor / project manager were paid for the project by the project’s owner / developer.

After addressing several preliminary challenges regarding choice of law, choice of forum and venue (all of which were explicitly provided for in the contractual agreements and specified Oakland County, Michigan as the forum for any litigation (the project was in Indiana)), the Court of Appeals addresses the main substance of the underlying arguments.

The subcontractor filed a motion for summary disposition alleging that the “pay if paid” provision was void due to fraudulent concealment by the general contractor / project manager of the true financial condition of the project owner.  The argument was had the subcontractor known about the shaky financial status of the project’s owner / investors, it may not have entered into a contractual agreement in which it accepted payment only if the general contractor / project manager was paid by the site owner.

The Court of Appeals affirmed the trial court’s rejection of this argument.  In a commercial setting, contracting parties are expected to exercise that degree of diligence necessary to protect their own rights vis-a-vis the other parties.  The Court of Appeals points out there was ample opportunity and information to glean the financial status of the project owner without having to rely on any representations or alleged misrepresentations of the general contractor.  Indeed, the subcontractor explicitly agreed to the contract’s terms, which acknowledged it had considered the site owner’s solvency and ability to pay.  The explicit language of the contract prevented the subcontractor from arguing the contract contemplated only a “reasonable delay” in payment.  In fact, the contract shifted the entire risk of nonpayment to the subcontractor.  There was no question the parties agreed to transfer the risk of upstream default or insolvency.

In short, contracting parties are expected to (1) read and understand the contract’s provisions, and (2) perform due diligence in the event payment for services rendered is conditioned on payment of a superior contractor.

To be sure, the primary argument regarding forum and jurisdiction may very well have resulted in a different outcome as the courts in Indiana are inclined to favor the insured, even in commercial settings like the present, and have allowed movement away from entire risk shifting contractual agreements.

In any event, this is an interesting case which teaches important lessons to the advocates of contractors and subcontractors.

About cjtucker06

Owner of law firm since July 2014; Handles all types of appellate matters and assists other lawyers with complex litigation and insurance coverage issues; Admitted to the Supreme Court of the United States, the Sixth Circuit Court of Appeals and the State Bar of Michigan; Expertise in prosecuting and defending appeals with several significant successes in the Sixth Circuit Court of Appeals, the Michigan Supreme Court and the Michigan Court of Appeals; Author of briefs amicus curiae in the Michigan Supreme Court for the Michigan Defense Trial Counsel and the Insurance Institute of Michigan; Represents Insurance Companies, Major International Business, Governmental Entities, Law Enforcement Officers and County Sheriffs. Board of Directors, Michigan Defense Trial Counsel Amicus Committee Co-Chair, Michigan Defense Trial Counsel Military - Retired Major in the Judge Advocate General (JAG) Corps of the United States Army, Brigade Judge Advocate and Staff JAG officer for the Maneuver Training Center, Camp Grayling, Michigan; Recipient of the Army's Meritorious Service Medal (the highest medal of honor available to Soldiers serving in non-combat roles); 2012 Graduate of the Judge Advocate Officer Advanced Course, at The Judge Advocate Legal Center and School, Charlottesville, Virginia. United States Navy Reserves, Combat Warfare Qualification, January 1989 to July 2003 Former law clerk to Justice Stephen J. Markman, Michigan Supreme Court, Research Attorney, Michigan Court of Appeals. Insurance Coverage Associate Plunkett Cooney; Environmental Law Attorney at Squire Sanders, now Squire Patton Boggs; Master's Degree in Environmental Law; Environmental Law Scholar, ALI/ABA Washington, D.C., Juris Doctorate, Vermont Law School, Environmental Editor, Vermont Law Review; Treasurer and Finalist, Moot Court Advisory Board.
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