Pay when Paid & Pay if Paid

pay here signRecently I was contacted by several readers asking questions about “Pay when Paid” clauses.  For those of you who may have missed it, I’ve previously addressed Pay When Paid issues in my April 29, 2010 post, Pay When Paid Clauses in the NC Construction Contract.

For a good discussion of the application of N.C. Gen. Stat. 22C-2, the Court of Appeals opinion American Nat. Elec. Corp. v. Poythress Commercial Contractors, Inc., 167 N.C.App. 97, 101, 604 S.E.2d 315, 317 (2004) is worth a read.

In that case, the electrical subcontractor sued the general contractor for delay claims. The contract provided that the contractor would only be liable to the subcontractor for delays if the contractor was compensated for such delays by the owner.  While such a term is clearly a “pay if paid” provision, the Court called the provision a “pay when paid,” and declared it unenforceable in North Carolina.  It seems likely, therefore, that the Court would find that both provisions have the same legal effect in North Carolina– that is, both are unenforceable.

One time when a “pay if/when paid” provision could be enforceable?  Residential construction of fewer than 12 units.

As always, consult your local attorney because such clauses very widely in their enforceability from state to state.

Questions or comments on “pay when paid” or “pay if paid”?  Drop me a line in the comments section, below.


Photo: “Pay Here” via / Creative Commons License. 


Active vs. Passive Negligence (Law note)

whole hog sign“As long as I was in, and in for good, I might as well go the whole hog.”

–Huck Finn, The Adventures of Huckleberry Finn by Mark Twain


If you work on a North Carolina construction project, you, too, are in “the whole hog” if you are negligent.  That is, if you are negligent at all, you are on the hook for the full lot.  As we’ve discussed, joint tort-feasors (that is, two negligent parties who are jointly & severally liable) are generally not entitled to indemnity from one another.

However, there are exceptions, and today we’re talking about one such exception– the passively negligent party.  

What is passive negligence?

Active negligence is an action which causes damage.  In contrast, passive negligence is negligence due to inaction, omission, or the failure to do something that you are legally obligated to do.   The actively negligent party is primary responsible for paying any damages, and the passively negligent party is only secondarily liable.

For example, if a subcontractor is actively negligent in constructing the framing for a building, and the general contractor failed to notice the defect, the subcontractor is actively negligent and the general contractor is passively negligent. 

Indemnity of the passively negligent party

Where the active negligence of one tort-feasor and the passive negligence of another combine to proximately cause injury to a third party, the passively negligent tort-feasor who is compelled to pay damages to the injured party is entitled to indemnity from the actively negligent tort-feasor.  This is called common-law indemnity, as opposed to contractual indemnity, which we discussed in an earlier blog post. 

In our example above, the subcontractor, as the actively negligent party, is the party ultimately responsible for the poor framing and the resulting damages.  If the general contractor is sued by the owner, he can in turn sue the subcontractor for the damages which were caused by the sub.

Questions about active versus passive negligence?  Drop me a line in the comments below.


Photo “Whole Hog Heaven BBQ” by Bill.Roehl via Flickr/Creative Commons license.

Contributory Negligence on the construction project (law note)

scale of justiceI’m sometimes asked if the percentage of “fault” is something that a client can rely on to reduce the amount of money they may owe on construction project gone bad.  The short answer:  no.   As I mentioned in my post on joint & several liability, if you are even 1% liable for the damages on a project, you can be hit with 100% of the damages. 

 This is not true in many other jurisdictions, where proportional fault (called comparative negligence) is often allowed.  In those states, if you are found 20% liable, you only have to pay 20% of the damages. Not so in North Carolina.  Here, unless you are entirely passively negligent (a concept we’ll discuss next week), you may be on the hook for the full amount.

That’s not fair!

Perhaps.  But, that’s life on a North Carolina construction project.  One concept that helps to reduce the unfairness factor is the concept of contributory negligence.  In North Carolina (but few other states), if a party is negligent at all (even 1%), they cannot recover from another negligent party.  

For example:  the owner of a project sues its general contractor on a project for a late project delivery which costs the owner money.  While almost all of the delay was the contractor’s fault, the owner also caused delay by failing to deliver owner-furnished equipment in time to meet the critical path of the project.  The owner’s own failure means that the owner itself is contributorily negligent and, under North Carolina law, the owner cannot recover the rest of its damages from the contractor.

But wait! There’s more.

Before you get too excited about contributory negligence, you need to understand the concept of  jury nullification.  When contributory negligence is explained to a jury, the jury may sometimes decide not to find fault where they might otherwise apportion fault, to avoid what they perceive as an unjust result. 

In the above example, the jury might decide the owner’s failure was not really contributing to the delay after all, and therefore award the owner damages.  This is called jury nullification, and it can take the sting out of contributory negligence.

Change to NC’s Contributory Negligence law?

The concept of contributory negligence (and its complete bar to any recovery) is one which many would like to change.  There has been legislation in the NC General Assembly in recent years to abolish contributory negligence in favor of a comparative-fault  negligence, as is common in most states.  So far, this has not happened.  As they say, however, the jury is still out on whether such a change will occur.  

Do you have an opinion on contributory negligence vs. comparative negligence? Think NC’s law should change to one based on percentage of fault?  Share in the comments below.


Photo “Scale—Image”  by Matthias Kulka/Corbis via Picasa/Creative Commons License

Pre-holiday reminder: plan for delays (Tues Tip)

colored leafAs the weather (finally) begins to turn to fall, people begin to make plans for fall and winter holidays with family and friends.  While negotiating the ins and outs of whos turn is it to get you for Thanksgiving this year, remember to plan for holiday delays on your construction projects.

Schedules matter.  And yet, vacations, holidays, weather, sickness, and other delays happen.  As I’ve written about previously on this blog, it is important that you prepare for delays in advance & document unanticipated delays

You know you will not have a full crew working 100% between Thanksgiving and Christmas, or between Christmas and the start of the new year.   Neither will your subcontractors.   Plan on it, and accomodate those delays now, ahead of time.

You also need to make temporary arrangements to fill in the gaps during holidays and vacations– both your own absence from the project and that of other trades.    Figure out who should be the contact person in charge in your absence.  Notify everyone who needs to know.  Inquire of your subs, owners, and material suppliers how they are staffing around the holidays.  Advance planning now equals fewer chances for costly delays.

Think of it as an early present to yourself to save yourself from last minute problems!


Photo “Fall Color, Autumn Colour, New England” by via Creative Commons License. 

Should I stay or should I go now? (Court vs. Arbitration)- Updated

gavelShould I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
So come on and let me know!

Are you wondering whether Court or Arbitration should be made a standard part of your construction contracts?  With apologies in advance to The Clash, there is “trouble” to be found in either venue.

Some companies, and their lawyers, insist that American Aribtration Association (AAA) Arbitration is the only way to go.  Others prefer to take their chances in a local state court.  Who is right?  Neither, and both.  As with anything, there is a cost-benefit analysis that you should go through prior to making either a standard part of your construction contract.

Pluses and Minuses of Going to Court

If a dispute is brought in court, there is a standard, fully vetted set of statutes, case law, court rules, and procedures already in place.  A judge, unlike the typical arbitration panel, is generally more willing to consider defenses based on statue, such as the statute of limitations or the statute of repose.  Summary Judgment, in which a judge will (on occasion) grant a judgment for or against  a party without the necessity of the full blown jury trial, is possible.  Such dispositive, procedural rulings are extremely unlikely to be granted by an arbitration panel.

On the other hand, a court trial means a jury verdict.  Unless the parties agree to waive their right to a jury trial, your case will be decided by true laymen who may have never set foot on a construction site before, and who will not understand the RFI, change order, and pay app process.  Terms like “substantial completion,” “critical path,” and “standard of care” will be foreign to them.

I’ve seen some juries get it right, and I’ve seen some get it wrong.  Most jurors take their responsibilities extremely seriously and will try to apply the law as the judge instructs them.  But at the end of the day, you have people unfamiliar with industry standards determining your case.

Pluses and Minuses of Arbitration

Many standard construction contracts contain arbitration provisions, generally AAA Arbitration.  The typical arbitration includes a three member panel of experts (construction professionals, designers, construction attorneys) who hear the evidence and make a ruling.  That ruling has the full force of law.The reasoning behind such arbitration clauses is that industry professionals better understand the construction process, standards of care, and interrelationships on a complex construction project.  Theoretically, therefore, they are better able to determine the true root cause of damages or delay.

Arbitration is sometimes considered to be less expensive and less time consuming than a court trial.  The arbitration panel generally sets fairly loose procedural and evidentiary boundaries, and tends to allow into evidence things that might not meet the strict Rules of Evidence that a court would apply.  Some of these generalities, however, have not proven to be true in practice.  AAA Arbitration can be costly– the filing of a claim alone is costlier than typical court fees.  Case managers add a layer of bureaucracy to the process.   Arbitration panels also generally are more prone to “split the baby” in a close case.

Which is Better?

The answer to that question is a clear and concise, “it depends.”  It depends on the facts of your particular case, the jurisdiction you are in, the type of panel you may get, and numerous other things completely out of your control.  Consult with a lawyer in your jurisdiction to discuss the pros and cons of each, and which may be right for your particular situation.

Do you have experience with court or arbitration?  Personal preference?  I’d love to hear your thoughts on the subject in the comment section below.

UPDATE 10/13/2010:  The AAA responded to this article citing their internal studies showing arbitration panels do not often “split the baby”.  See more here


Photo “Courtroom One Gavel” by Joe Gratz via Flickr/Creative Commons license.