Thos. J. Dyer Co. v. Bishop International Engineering Co.
303 F.2d 655 (1962)
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Rule of Law:
A contract provision that postpones payment to a subcontractor until the general contractor has been paid by the owner is generally construed as a timing mechanism, not a condition precedent. To transfer the risk of the owner's non-payment to the subcontractor, the contract must contain an express condition clearly and unequivocally showing that to be the parties' intent.
Facts:
- On August 19, 1958, Bishop International Engineering Company ('Engineering Company') contracted with The Kentucky Jockey Club, Inc. ('Jockey Club') to construct a portion of the Latonia Race Track.
- On April 27, 1959, The Thos. J. Dyer Company ('Dyer') entered into a subcontract with the Engineering Company to perform plumbing and utility work for the project.
- Paragraph 3 of the subcontract stated that no payment would be due to Dyer until five days after the Jockey Club paid the Engineering Company.
- Dyer fully completed its work under the original subcontract and subsequent change orders by August 1, 1959, and the project was accepted by the Jockey Club on August 28, 1959.
- The total consideration owed to Dyer for all work was $227,652.17, of which the Engineering Company paid $119,133.06, leaving an unpaid balance.
- The Engineering Company received payment from the Jockey Club for the work under the original contract, but not for the additional work performed by Dyer.
- On December 4, 1959, the Jockey Club filed for reorganization under Chapter X of the Federal Bankruptcy Act, rendering it unable to make further payments.
Procedural Posture:
- The Thos. J. Dyer Company (appellee) filed a lawsuit in the United States District Court against Bishop International Engineering Company (appellant) and its surety, General Insurance Company of America, to recover the unpaid balance for its work.
- The parties submitted a stipulation of facts to the District Court.
- The District Court sustained Dyer's motion for summary judgment and entered a judgment in its favor.
- Bishop International Engineering Company and General Insurance Company of America appealed the District Court's judgment to the United States Court of Appeals for the Sixth Circuit.
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Issue:
Does a contract provision stating that a subcontractor's payment is not due until five days after the owner pays the general contractor create a condition precedent to payment that shifts the risk of the owner's insolvency to the subcontractor, or does it merely postpone payment for a reasonable time?
Opinions:
Majority - Chief Judge Shackelford Miller, Jr.
No. A contract provision stating that a subcontractor's payment is not due until the owner pays the general contractor does not create a condition precedent to payment but merely postpones the time of payment for a reasonable period. The court reasoned that the normal credit risk of an owner's insolvency lies with the general contractor, who contracts directly with the owner. To transfer this risk to the subcontractor, the contract must contain an express condition in unequivocal terms that clearly shows this was the parties' intention. The clause in question, which deals with the timing and method of payment, lacks the clear language necessary to shift this risk. To construe it as a condition precedent would be unreasonable, as it could result in the subcontractor never being paid for completed work, a result the parties did not likely contemplate.
Analysis:
This case establishes a significant default rule for interpreting "pay-when-paid" clauses in construction contracts, placing a high burden on general contractors to use explicit language to create a true "pay-if-paid" condition. The ruling protects subcontractors by ensuring that ambiguous payment timing clauses do not force them to bear the ultimate risk of owner insolvency. This decision has shaped contract drafting in the construction industry, compelling parties who wish to shift the risk of non-payment to use clear and unequivocal terms that explicitly state payment by the owner is a condition precedent.
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