ASA Seeks to Overturn Pay-If-Paid Contract Court Case

The American Subcontractors Association (ASA) is asking the Supreme Court of Kentucky to overturn a January 2015 Kentucky Court of Appeals’ ruling the ASA says precluded steel subcontractors from recovering payment for extra-contractual work amounting to more than $400,000 under a “pay-if-paid” contract clause.

“The appeals court decision, if left standing, could have a profound impact across Kentucky, where billions of dollars of construction work is either in planning or in progress,” the ASA wrote.

The case is Superior Steel, Inc. and Ben Hur Construction Company, Inc. vs. the Ascent at Roebling’s Bridge, LLC, Corporex Development & Construction Management, LLC, Dugan & Meyers Construction Company and Westchester Fire Insurance Company.

The ASA claims in its amicus brief filed with the Supreme Court of Kentucky last week the Court of Appeals’ erred when, in 2011, it reversed two lower courts’ judgments and effectively precluded steel subcontractors in the case from recovering payment for extra-contractual work under a “pay-if-paid” contract clause, and “… permitted the project owner to benefit from valuable extra-contractual work provided by subcontractors without payment, known as ‘unjust enrichment.’”

“The equitable doctrine of unjust enrichment against an owner applies to subcontractors who do not have contracts with the owner, even where a contract exists between the subcontractor and the general contractor,” the ASA writes. “Further, the pay-if-paid clause cannot preclude appellants’ recovery since it is either void or has been waived.”

In the case, the owner, Ascent at Roebling’s Bridge, LLC, entered in 2006 a contract with Corporex Development and Construction Management to design a 21-story, 72-unit condominium and garage project in Covington, KY, according to court documents. Corporex, in turn, entered into a contract with Ohio-based Dugans & Meyers Construction Company to provide management services for the project. This latter contract included furnishing materials, labor, services and tools, etc. to complete the work. Dugans then entered into various contracts with subcontractors, including for structural steel supply and fabrication with Superior Steel Inc. The steel subcontracts contained written change order requirements to have all change orders in writing, and a “pay-if-paid” provision that stated the owner’s payment to the construction management firm was a condition precedent to the firm’s obligation to pay the steel subcontractors on the job.

Ultimately, Dugans & Meyers refused to pay for extra materials and work completed by the steel subcontractors, which filed mechanics’ liens in the Kenton County Clerk’s office in December 2007, thus precipitating the lawsuit, court documents state.

The ASA told the Supreme Court that pay-if-paid clauses effectively strip subcontractors and others of their mechanic’s lien rights and should be considered void under Kentucky’s Fairness in Construction Act. “It has been the policy of Kentucky law to construe mechanic’s liens liberally to protect those who furnish labor and materials,” ASA wrote.

- Nicholas Stern, editorial associate

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