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Beware of Pay-If-Paid Clauses: Maryland Court Dismisses Subcontractor’s Delay and Acceleration Claims after Owner Denies Change Orders

The Maryland Court of Appeals upheld the dismissal of a subcontractor’s delay and acceleration claims against a general contractor after the court determined that a pay-if-paid provision existed in the subcontract and the owner refused to remit payment.  The court concluded that, despite directing the subcontractor to accelerate work on the project, the general contractor could use the protection of the pay-if-paid provision when the owner refused to approve payment for the additional costs.

In Young Electrical Contractors, Inc. v. Dustin Construction, Inc., 2016 Md. App. Lexis 1588 (2016), Dustin Construction, Inc. entered into a contract with George Mason University in Virginia to renovate and construct an addition to its Student Union.  Dustin subcontracted with Young Electrical Contractors, Inc. to perform the electrical scope of work on the project.  Originally scheduled for a completion date of November 15, 2010, the project reached substantial completion on March 8, 2011.  Young submitted two change orders: one seeking extended overhead costs associated with the extension of the contract and the other claiming changes for owner initiated design changes, design errors, unforeseen conditions and acceleration.  Young’s claims were submitted to Dustin, who in turn, submitted the claims to George Mason.  George Mason denied the claims and Dustin refused to remit any payment for either claim as a result of the pay-if-paid

The Maryland Court of Special Appeals, applying Virginia law, held that the existence of a valid pay-if-paid clause protects Dustin from Young’s claims.  From a practical standpoint, this case further shifts potential exposure for non-payment away from general contractors and to their subcontractors.  Even in situations where the subcontractor was not the cause of the delay and was forced to accelerate its work to meet revised project deadlines, the existence of the pay-if-paid clause precludes payment unless the general contractor receives payment.  Subcontractors can seek to protect themselves by seeking removal of the pay-if-paid provisions or including language in the subcontract that would allow them to bring forth a claim against the owner of a project in the general contractors’ name.

For more information on construction law in Maryland, Washington D.C., or Virginia, contact Michael W. Siri at 410-583-2400 or siri@bowie-jensen.com.

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