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In J&H Grading & Paving, Inc. v Clayton Construction Company, Inc., 441 S.C. 272 (2023), the South Carolina Court of Appeals held that statutory language expressly prohibits parties from conditioning payment to the subcontractor upon the owner’s payment to the general contractor and makes any agreement to the contrary unenforceable.

Clayton Construction Company, Inc. (“Clayton”), the general contractor for the construction of a new car dealership, subcontracted with J&H Grading & Paving, Inc. (“J&H”) for the site work for the project. The total contract price between Clayton and J&H was $716,930.70 and the contract contained language that stated: “Final payment of the balance due shall be made to [J&H] no later than seven (7) days after receipt by [Clayton] of final payment from Owner [for J&H’s] work.” This is considered a “Pay When Paid” provision.

J&H completed its scope of work on March 20, 2017, a certificate of occupancy was issued, and J&H submitted its final pay application to Clayton on April 26, 2017. Clayton responded on August 1, 2017 stating that it had not been paid by the owner and, therefore, could not issue its final payment to J&H until Clayton had been paid. Clayton did not dispute the amount due or that J&H had satisfactorily completed the work. After a series of emails and requests for payment, J&H filed a certificate of mechanics’ lien on the property on February 27, 2018. Clayton responded by referring to the Pay When Paid provision in the contract, stating there was no amount due and owing to J&H at that time as Clayton still had not been paid by the owner.

J&H filed this lawsuit against Clayton and the owner for foreclosure of the mechanics’ lien, breach of contract, and quantum meruit. A year later, J&H, Clayton, and the owner entered into a settlement agreement in which the owner agreed to release the remaining amounts owed to J&H directly to J&H as payment for the subcontract. J&H released its claims against the owner but reserved the right to claim attorney’s fees and interest against Clayton.

A bench trial was held by the circuit court on the issue of whether J&H was entitled to attorney’s fees under the applicable state statute. J&H argued Clayton had conditioned its final payment on payment from the owner, which was expressly prohibited pursuant to section 29-6-230, which provides:

Notwithstanding any other provision of law, performance by a construction subcontractor in accordance with the provisions of its contract entitles the subcontractor to payment from the party with whom it contracts. The payment by the owner to the contractor or the payment by the contractor to another subcontractor or supplier is not, in either case, a condition precedent for payment to the construction subcontractor. Any agreement to the contrary is not enforceable.

S.C. Code Section 29-6-230.

The court found in favor of J&H and concluded it was entitled to attorney’s fees. Clayton filed a motion to reconsider, which the circuit court denied.  This appeal followed. The appellate court determined that the statute expressly prohibits a general contractor from conditioning payment to the subcontractor upon payment to the general contractor and that any agreement to do so is contrary to the statute and unenforceable.

Parties contracting in construction need to be mindful of this “Pay When Paid” language and review their contracts for this provision.  Not all states forbid the enforcement of a pay-when-paid clause, and thus, contracting parties need to be aware of their state’s position on this concept and ensure they understand the payment terms they are agreeing to.