FL CT OF APPEALS FINDS AMBIGUOUS PAY-WHEN-PAID CLAUSE IN SUBCONTRACT MUST BE RESOLVED IN FAVOR OF SUBCONTRACTOR

FLORIDA COURT OF APPEALS FINDS THAT AMBIGUOUS PAY-WHEN-PAID CLAUSE
IN SUBCONTRACT MUST BE RESOLVED IN FAVOR OF THE SUBCONTRACTOR

In International Engineering Services, Inc. v. Scherer Construction & Engineering of Central Florida (opinion filed October 21, 2011), a subcontractor sued the general contractor, alleging breach of the parties' subcontract for failure to pay. At issue was a pay-when-paid clause in the parties' contract.

The trial court found that the language in the subcontract was not ambiguous and it was clearly meant to shift the burden of nonpayment by the owner from the general contractor to the subcontractor. The appellate court found, however, based on the language contained in the subcontract and in the prime contract, the pay-when-paid clause was ambiguous and unenforceable.

The pay-when-paid clause in the subcontract was a clear expression that the parties intended for the subcontractor to assume the risk of loss for nonpayment. However, another article of the subcontract clearly incorporated the prime contract by reference. The prime contract provided that the owner was not obligated to pay the contractor until the contractor had paid all its subcontractors. By incorporating the prime contract into the subcontract, the pay-when-paid clause became ambiguous. The Court resolved the ambiguity against the contractor, and interpreted it as establishing a reasonable time for the general contractor to pay the subcontractor.

This case is important for general contractors in Florida. It provides notice that if you incorporate the prime contract into the subcontract by reference and an ambiguity is created, the ambiguity will be interpreted against the general contractor and in favor of the subcontractor.