In 2023, the South Carolina Court of Appeals handed down an important decision which focuses on pay when paid and pay if paid clauses in contracts. The Court’s opinion highlights the importance of understanding the distinctions between these two clauses and the differences that exist from state to state regarding their enforceability.

The Case Notes

In J&H Grading & Paving, Inc. v Clayton Construction Company, Inc., 441 S.C. 272 (2023), Clayton Construction Company, Inc. (“Clayton”) was the general contractor for the construction of a new car dealership. Clayton subcontracted with J&H Grading & Paving, Inc. (“J&H”) for site work. The contract between Clayton and J&H contained the following language.

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. 

J&H submitted its final payment application to Clayton on April 26, 2017. On August 1, 2017, Clayton responded saying that it had not been paid by the owner and, as such, could not issue its final payment to J&H until Clayton had received payment. Clayton did not dispute the amount of J&H’s final payment application and there was no dispute that J&H had not performed the work. Clayton also had no reason to withhold any monies from J&H for other reasons related to J&H’s work under the subcontract.

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 that it did not owe J&H because Clayton still had not been paid by the owner.

J&H filed a lawsuit against Clayton and the owner for foreclosure of the mechanics’ lien among other things. 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 trial was held on the discrete issue of whether J&H was entitled to attorney’s fees. J&H argued Clayton had conditioned its final payment on payment from the owner, which was expressly prohibited under South Carolina law 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…is not…a condition precedent for payment to the construction subcontractor. Any agreement to the contrary is not enforceable.

The trial court found in favor of J&H and concluded it was entitled to attorney’s fees. Clayton appealed.

The appellate court determined that South Carolina law expressly prohibits a general contractor from conditioning payment to a subcontractor upon payment to the general contractor by an owner and that any agreement to do so is contrary to South Carolina law and unenforceable.

The Foundation

Before we get to the key takeaways of this case and the rationale behind the court’s decision, it is important to understand what pay when paid and pay if paid clauses mean in a contract and the distinctions between the two. Simply put, a pay when paid clause addresses timing for when a subcontractor will be paid by a contractor. The following is an example of a pay when paid clause:

The Subcontractor shall be paid within ten (10) business days after receipt of payment from the Owner by the General Contractor for Subcontract work.

A pay if paid clause on the other hand is all about shifting the risk of nonpayment by the owner to the subcontractor. Here is an example of a pay if paid clause.

Contractor’s receipt of payment from the Owner is a condition precedent to Contractor’s obligation to issue payment to the Subcontractor. The Subcontractor fully understands that it bears the risk of non-payment by the Owner.

The law regarding pay when paid and pay if paid clauses differs from state to state. Whereas some states deem pay if paid clauses enforceable, about a dozen states, including the State of South Carolina, restrict the use of pay if paid clauses in subcontracts. Some states such as Colorado require that if a pay if paid clause is in a contract, it must contain specific language such as the contractor’s receipt of payment from the owner is a condition precedent to the subcontractor getting paid, and language that expressly states that the subcontractor assumes the risk of nonpayment if the contractor does not receive payment from the owner. The laws on the books in about 24 states say that a subcontractor can still file a lien on a project for monies owed even though their subcontract contains a pay if paid clause.

Most of the states recognize pay when paid provisions. However, if a contractor has not been paid by an owner, having a pay when paid provision in the contractor’s contract with a subcontractor does not allow a contractor not to pay a subcontractor indefinitely. The law in the case of pay when paid contracts applies the legal standard of reasonableness to the period of time in which a contractor has not been paid by an owner which can be uncertain and frustrating. The decision in J&H Grading & Paving, Inc. added yet another wrinkle in this patchwork of laws on payment provisions in subcontracts.

The Takeaway

In J&H Grading & Paving, Inc., the Court relied on the state’s Prompt Pay Act which requires payment to a subcontractor within 90 days. The Court used this period of time as the absolute outer limit that a subcontractor must be paid under a pay when paid clause even if the contractor has not received payment from the owner. The Court then determined that the contractor’s lack of payment to the subcontractor beyond 90 days was unreasonable and that the pay when paid language in the subcontract was effectively rendered pay if paid. The Court reiterated that in the State of South Carolina, a general contractor is prohibited from conditioning payment to a subcontractor upon payment to the general contractor (i.e., pay if paid) and that any agreement to do so is unenforceable.

Even though there was no dispute regarding the amount owed to J&H or that J&H had satisfactorily performed the work, the decision in J&H Grading & Paving, Inc. affirms that a contractor can still withhold payment to a subcontractor for the subcontractor’s failure to comply with the terms of the contract (e.g., they caused delays, performed defective work, or liens were filed by their sub-tier subcontractors because the subcontractor failed to pay them and had received payment from the contractor for the sub-tier subcontractors’ work).

Conclusion

With improvements to Dennis Group’s standard Subcontractor Agreement that will roll out over the course of the next month, an eventual designated resource on the Legal team, and new procedures in place to guarantee the enforceability of the payment language in the contracts we enter into with subcontractors and vendors on our projects in various states, Dennis Group will be poised to avoid traps for the unwary such as this one involving a general contractor, subcontractor and a pay when paid provision in a subcontract for a South Carolina project.

Navigating the rules and regulations surrounding signing and sealing drawings and other instruments of service (collectively “Work Product”) as an engineer or architect can be complex, with variations based on project location, document type, and other project specifics. In this issue of Legal Bites, we attempt to demystify the signing and sealing rules of the state boards of engineering and architecture by walking you through some examples from states that are significant DG project locations, but first off, what does an engineering or architectural seal mean?

The act of signing and sealing Work Product signifies that (1) the work was prepared by the design professional or under the design professional’s direct control or personal supervision; (2) the signing and sealing design professional is of the opinion that the documents meet usual and customary standards of practice; and (3) the documents are appropriate for review and approval by the applicable code enforcement official.

What Requires Signing and Sealing?

Signing and sealing drawings and specifications is generally mandatory on construction projects involving civil, structural, electrical, mechanical (as well as other engineering disciplines), or architectural services. Some state rules differentiate between public and private clients when stating whether Work Product needs to be signed and sealed whereas other states require that only Work Product being filed with a public authority gets signed and sealed. Inconsistencies also exist between states concerning which documents prepared by an engineer or architect need to be signed and sealed as demonstrated by the following rules from California, Georgia and Utah.

All electrical engineering plans, specifications, calculations, and reports (hereinafter referred to as “documents”) prepared by, or under the responsible charge of, a licensed electrical engineer shall include his or her name and license number…All electrical engineering plans and specifications that are permitted or that are to be released for construction shall bear the signature and seal or stamp of the licensee and the date of signing and sealing or stamping. All final electrical engineering calculations and reports shall bear the signature and seal or stamp of the licensee and the date of signing and sealing or stamping…(CA Electrical Engineering Rule 6735.3. Signing and sealing of electrical engineering documents)

The term, “documents,” as used herein shall mean engineering and/or land surveying work issued in the form of plans, drawings, maps, surveys, reports, specifications, design information, and calculations…(GA Engineering Rule 180-12-.02 Sealing of Documents)

Any final plan and specification of a building prepared by or under the supervision of the licensed architect shall bear the seal of the architect when submitted to a client, or when submitted to a building official for the purpose of obtaining a building permit…(UT Architecture Rule 58-3a-602.  Plans and specifications to be sealed)

What About Digital Sealing?

With the shift by virtually every industry, including construction, to creating documents by exclusively electronic means, many design professionals wonder what is required to sign and seal electronic documents. Does it mean that they can scan an impression of their seal and affix the pdf image that results onto Work Product? What about their signature? Can this be a pdf image, too? As demonstrated below, we see variation amongst the states here, too. However, most states have moved toward requiring the use of a secure tool that maintains the security of the design professional signing and sealing, and the authenticity of the Work Product. Watch for a future issue of Legal Bites wherein we will introduce you to a state-by-state reference tool for determining whether digital sealing is required.

Documents to be electronically transmitted beyond the direct control of the licensee that are signed using an electronic signature shall contain the authentication procedure in a secure mode and a list of the hardware, software and parameters used to prepare the document(s). Secure mode means that the authentication procedure has protective measures to prevent alteration or overriding of the authentication procedure…The term “electronic signature” shall be an electronic authentication process that is attached to or logically associated with an electronic document. The electronic signature shall be:

(a) Unique to the licensee using it;

(b) Capable of verification;

(c) Under the sole control of the licensee; and

(d) Linked to a document in such a manner that the electronic signature is invalidated if any data in the document is changed. (GA Engineering Rule 180-12-.02 Sealing of Documents)

When a digital Signature is applied to an Instrument of Service, it must have an electronic authentication process attached to it that is uniquely associated with the Registrant, can be authenticated by the recipient, and is uniquely linked to the underlying documents in a manner that will invalidate the digital Signature if any part of the document is changed. (MA Engineering Rule 5:03: Professional Seal)

…Electronically generated seals and signatures are acceptable.  It is the responsibility of the licensee to provide adequate security when documents with electronic seals and electronic signatures are distributed….(UT Architectural Rule R156-3a-601. Architectural Seal – Requirements)

Other Sealing Idiosyncrasies

Beyond what needs to be signed and sealed and rules around digital sealing of Work Product, individual state boards of engineering and architecture can impose other requirements related to signing and sealing Work Product. For example, some states require that in addition to the seal, signature and date affixed to Work Product by the individual signing and sealing, information regarding the firm they are associated with or employed by must also be included on Work Product. The following is the State of Georgia’s rule on this point.

The registrant shall seal, sign and date and provide COA name, Authorization Number and expiration date of the COA all original final documents which are issued to a client or any public agency.  (GA Engineering Rule 180-12-.02 Sealing of Documents)

The rules often address how to sign and seal Work Product that consists of multiple sheets. Most states require that each sheet be signed and sealed; however, Georgia provides another option in the following rule.

If necessary due to number of sheets, in lieu of providing a seal, signature, date, and COA information on each drawing sheet, a summary sheet may be included in the form of a clearly drafted table or other format that identifies each registrants seal, signature, date, and COA information and which includes a narrative that clearly describes the element of work for which each registrant is responsible and indicates the most current version of each sheet. This summary sheet shall be included within the final documents. If a document is sealed, signed and dated and contains the entity’s COA information by more than one registrant, the portion of the work for which each registrant is responsible shall be clearly noted.

Whose Responsibility is it to Comply with these Rules?

The responsibility to meet the rules regarding signing and sealing Work Product is among the most important and critical responsibilities of a design professional. Moreover, a seemingly minor violation of the rules can result in disciplinary action by a professional board. It is the responsibility of the DG design professional acting in responsible charge of the professional services being delivered on a DG project (i.e., civil, structural, mechanical, electrical, architectural) and signing and sealing DG Work Product to verify the state-specific signing and sealing requirements applicable to a project.

Fortunately, this information is readily available on all state licensing boards’ websites. As such, we encourage all DG engineers and architects to keep apprised about the rules of the professional boards in the states where they are registered not only concerning the application of their seals on Work Product, but in other areas, as well, which we will cover in future issues of Legal Bites.

In this issue of Legal Bites, guest contributor Agatha Bukowski and I get into the rules of professional engineering and architecture regarding signing and sealing drawings, specifications, and other work product that our design professionals prepare on DG projects.

We often encounter language in our contracts with clients that includes the legal concepts of negligence and gross negligence. These terms are typically found in the indemnity clause of a contract and can also appear in exclusions in limitation of liability and waiver of consequential damages clauses, but what do they actually mean?

Negligence

The legal definition of negligence is made up of four distinct elements. First, there needs to be a duty owed to the party who is claiming negligence. A duty can be established by contract, a duty to exercise reasonable care, and even customary norms. DG’s professional services are measured by an industry standard of care which is that degree of care and skill ordinarily exercised by those practicing the same profession, under the same circumstances, and in the same location. In other words, the measure of DG’s services is subject to evaluation by its peers.

Second, for negligence to be established there needs to be a breach of a duty owed to the claimant. If a claimant establishes evidence through expert witness opinion that DG’s services fell below its standard of care, DG can be found negligent.

Third, a claimant needs to establish that the damages they are claiming were caused by the party they allege was negligent. DG’s projects often have over 100 subcontractors working on them, as well as other parties hired directly by our Owner clients. By way of a somewhat silly example, our client’s office cleaning vendor should not be held responsible for damages caused by a plumbing contractor’s defective installation of plumbing fixtures as the cleaning vendor did not cause the Owner’s damages.

Fourth, the claimant must suffer damages to prevail on a negligence claim. A prime example in our business is if DG prepares drawings and specifications for a project and they contain several deficiencies that are not caught until after construction. The Owner in this case would be entitled to recover the monetary damages they sustained in having to pay a contractor to de-install and re-install what was constructed. On the other hand, if the claimant incurs no monetary damages, they cannot prevail on a negligence claim. To illustrate where this might occur is if DG corrects errors and omissions that it catches in its designs before construction at no cost to the Owner and no further damages flow from the same errors and omissions. In this case, the Owner should not be able to recover monetary damages.

Gross Negligence

Gross negligence is also a breach of the duty of care, but unlike ordinary negligence, gross negligence is so severe of a breach that it constitutes recklessness. Reckless conduct implies that a party was aware — or should have been aware — that their actions would harm another person, yet they still chose to act. Gross negligence can best be described as conscious conduct that is so careless that it appears deliberate.

Gross negligence is commonly alleged in cases involving personal injury and fatalities on construction projects. The following case illustrates how a jury found a General Contractor to be grossly negligent when a worker for a glass subcontractor fell ten stories to his death while working on a hospital construction project in Texas. The Court of Appeals affirmed the trial court’s award of $7.9 million in compensatory damages and $5 million in punitive damages. The Court concluded that (1) the General Contractor retained the right to control its subcontractor’s fall protection measures and thus owed a duty to the worker, (2) the General Contractor’s failure to ensure adequate fall-protection measures proximately caused the worker’s fall, and (3) the General Contractor was grossly negligent.

The Court found gross negligence on the part of the General Contractor because it would be apparent to anyone in the General Contractor’s position that there was an extreme risk of serious injury to anyone working on the tenth floor of the building where the only fall protection observed was a safety belt and lanyard when there should have been an independent lifeline. As further evidence of the General Contractor’s gross negligence, a representative for the General Contractor testified that they were aware of the inadequate fall protection used by the worker but consciously chose to do nothing about it.

Key Takeaway

While DG has an excellent safety program and record and our safety professionals assume great responsibility for the health and safety of persons on our projects, the above case is a stark reminder that if someone is injured or dies on one of our projects, our conduct and practices leading up to the injury or death will be closely scrutinized. Deviations from observing safety rules and regulations, conduct that does not conform to applicable safety policies and procedures (including those of our own), and an attitude of indifference can result in a finding of gross negligence. A gross negligence verdict can result in excessive punitive damages above and beyond direct damages typically associated with ordinary negligence.

Who doesn’t like a good story? From time to time, I will attempt to teach our readers about risk management using case law. Most court cases start with a story. In the case of litigation involving construction projects, these stories can be quite familiar to us and relatable to our business.  

In this month’s issue of Legal Bites, I share a story from a case about a subcontractor who refused to perform work until they received a written change order. Read on to learn how things turned out for both the subcontractor and general contractor. 

The case of McCarthy Concrete, Inc. v. Banton Construction Company stemmed from a large train station project in Rensselaer County, NY. Banton was the general contractor. McCarthy was a concrete subcontractor. The bid documents for the project required that concrete be poured. McCarthy’s subcontract excluded “concrete pumping”. However, after the project had already started, McCarthy was informed that the remaining concrete on the project had to be pumped (among other changes).  

McCarthy informed Banton that the change from poured to pumped concrete would result in a price increase which Banton did not dispute. However, McCarthy and Banton could not agree on the amount of the price increase. Banton issued a 72-hour notice to McCarthy stating that if McCarthy failed to commence the extra work within the 72 hours, Banton would terminate McCarthy for default. McCarthy refused to proceed with the extra work as directed by Banton without an executed change order. As a result, Banton terminated McCarthy’s contract and retained another concrete sub to complete McCarthy’s scope of work.  

McCarthy sued Banton for additional compensation, including retainage and claimed that they had been wrongfully terminated by Banton. Banton asserted a counterclaim against McCarthy for breach of contract and recovery of the costs they incurred completing McCarthy’s work.   

The trial court ruled in favor of McCarthy on the basis that the increase in McCarthy’s costs as a result of the change in concrete placement on the project was material. The trial court also dismissed Banton’s counterclaim. Not surprised, Banton was unhappy with these results, so they appealed. 

Focusing on the following language of the contract between McCarthy and Banton (which is commonly found in most construction contracts), the appellate court reversed the trial court’s decision.  

“[p]ending resolution of any claim, dispute or other controversy, nothing shall excuse [McCarthy] from proceeding with the prosecution of the [w]ork.”  

The court held that when McCarthy refused to do the extra work once Banton directed them to it, that McCarthy breached the contract and that Banton was in the right to terminate them. The court said in its opinion: 

“ [McCarthy’s] refusal to perform the changed work without an express agreement as to increased costs has the effect of holding Banton hostage [because] the work, which was part of much larger project, was stalled.” 

So, the court held this way in the interest of economy. Delays are costly and it makes little sense to hold up an entire job fighting over the value of a change order.  

The court also granted Banton’s counterclaim, allowing Banton to set off its completion costs against the subcontract retainage due to McCarthy. 

The key takeaway from this case for general contractors and subcontractors alike is that contract language requiring continuation of the work while disputes are resolved means just that. The best practice is to proceed with the work and maintain the right to pursue claims later, if necessary. In other words, work now and dispute later. 

Introduction

From time to time, Dennis Group (DG) gets asked to sign Non-Disclosure Agreements or Confidentiality Agreements (“NDA”). We typically receive NDAs when we are pursuing a project or at the beginning of a project. It is important to know what DG’s obligations are under an NDA and to conduct ourselves accordingly. The following guide will help you review and understand the language of an NDA.

Definition of Confidential Information

The definition of Confidential Information is a key clause in an NDA. Confidential Information typically includes items such as information concerning the subject matter of the NDA (e.g., our client’s or potential client’s project). Confidential Information can also include financial information, trade secrets, intellectual property, proprietary and other sensitive information of the party seeking protection from the NDA. Sometimes NDAs are mutual meaning that the agreement protects the Confidential Information of both parties.

What to Watch for: Make sure that you understand the scope of what is defined as Confidential Information. It is often useful to require that the party disclosing Confidential Information label it as such so that there is no misunderstanding and so that we care for and treat the information appropriately. Do not underestimate how broad the scope of Confidential Information can be. It can also include DG’s work product.

Exclusions from Confidential Information

NDAs typically contain language that clarifies what should not be considered Confidential Information. Information that was in the public domain or already in the receiving party’s possession at the time of disclosure, or information required to be disclosed pursuant to law are a few examples.

Confidentiality Obligations

In addition to understanding the breadth of what does and does not constitute Confidential Information in an NDA, it is important to know what our actual obligations are. NDAs typically state that the Confidential Information must be held by the recipient in strict confidence and that the Confidential Information must not be used for any other purpose. Most NDAs also state that Confidential Information must not be disclosed without the prior written consent of the party disclosing the information.

What to Watch for: How we must treat Confidential Information pursuant to an NDA can be more stringent than how we are accustomed to treating our own confidential information. No matter what our intended use of Confidential Information may be, whether it be for marketing purposes or otherwise, we should always seek written permission from the disclosing party when in doubt.

Term of Agreement

The term of an NDA is the period of time during which our obligation to maintain confidentiality lasts. The term of an NDA is typically a period of years. We usually see 3, 5 or 10-year terms.

What to Watch For: In rare instances, we may find that the obligation to maintain confidentiality pursuant to an NDA is perpetual. We should push back on such obligations because they are overly burdensome from an administrative standpoint.

Application to Third Parties

When we enter an NDA, it typically applies to employees, consultants, subcontractors, and agents. Therefore, we should discuss our confidentiality obligations on a project with our project teams and, at a minimum, send them and our subcontractors a copy of the NDA. We should also ask employees and subcontractors to confirm in writing that they have read the NDA and agree to be bound to it to the same extent as DG is bound. Email is fine for this purpose. For a more formal form of NDA acknowledgment, contact General Counsel.

Remedies for Breach

Money damages as a result of a breach of confidentiality are difficult to ascertain and the appropriate remedy for a breach of confidentiality under an NDA is injunctive relief. In this case, the non-breaching party goes to court and seeks an order directing the breaching party to stop disclosing the Confidential Information.

What To Watch For: Sometimes NDAs contain indemnification clauses for breach of confidentiality. For the same reason that injunctive relief is more appropriate than money damages in the event of a breach (i.e., money damages are unforeseeable and immeasurable), we do not want to agree to indemnify the other party for our potential breach of an NDA.

Return or Destruction of Confidential Information

NDAs often contain a provision dealing with the return or destruction of Confidential Information at the time of termination of the agreement. This may include an obligation to certify in writing that we have destroyed all documents containing Confidential Information that we received. This may be difficult to do 5+ years after the fact and we typically want to retain at least one copy of any project documents for archival purposes.

Red Flags/When to Seek Legal Advice

Exclusivity/Non-Competition

An exclusivity clause is a promise not to work for a competitor of the party with whom we are entering an NDA. Due to the nature of DG’s business, we should never accept such a provision in a contract. Such promises limit DG’s business for other clients and impacts DG’s obligations under existing agreements.

Intellectual Property

Keep an eye out for language in an NDA that suggests that the other party obtains rights in DG’s intellectual property. One example might be DG’s standard details that we intend to use on the project that is the subject of the NDA and on other projects for different clients. If we do not carefully review language in an NDA concerning DG’s intellectual property, we risk inadvertently transferring our rights in such intellectual property to the other party.

Conclusion

The next time you receive an NDA on one of your projects, read through it while relying on this guide. NDAs are usually 5 pages or less in length, so it should not take you long. You will be surprised how much better you understand the language and its implications. Keep in mind that currently only Tom Dennis and the Senior Partners have authority to sign NDAs on behalf of DG.