September 12, 2023
Construction Law

South Carolina Court of Appeals Issues New Pay-When-Paid Guidance

South Carolina Court of Appeals Issues New Pay-When-Paid Guidance

Pay-if-paid clauses have long been unenforceable in South Carolina. See S.C. Code Ann. § 29-6-230. South Carolina courts have held pay-when-paid clauses are enforceable, however, to provide a “reasonable” time—a previously undefined term—to make payment where a contractor has not received payment from the owner. In August 2023, through J&H Grading & Paving, Inc. v. Clayton Construction Company, Inc., the South Carolina Court of Appeals has now defined the “reasonable” length of time to make payment. Going forward, a contractor cannot delay payment to a subcontractor based upon a pay-when-paid clause for more than 90 days from a subcontractor’s final application for payment. 

In J&H Grading, a sitework subcontractor completed its work and issued its final application for payment in April 2017. Despite agreeing that the subcontractor was entitled to payment of the amount sought, the general contractor declined to issue payment, relying on the pay-when-paid provision in the parties’ subcontract. That provision stated: “Final payment of the balance due shall be made to [subcontractor] no later than seven (7) days after receipt by [general contractor] of final payment from Owner [for subcontractor’s] work.” After numerous demands and completing its punch list work in December 2017, the general contractor continued to refuse to pay the subcontractor because it had not received payment from the owner and continued to rely upon the subcontract’s provision supporting the same.

In February 2018, the subcontractor filed a South Carolina mechanic’s lien against the Project. Several weeks later, the subcontractor served a formal demand on the general contractor in the form of a S.C. Code Ann. § 27-1-15 demand, seeking payment of the withheld retainage. S.C. Code Ann. § 27-1-15 provides that the person to whom a demand for payment is made must “make a reasonable and fair investigation of the merits of the claim and to pay it, or whatever portion of it is determined as valid, within forty-five days from the day of mailing the demand.” Upon receipt of a demand under the statute, the person on whom the demand is made may be liable for attorney’s fees and interest if it “unreasonably refuses to pay the claim or proper portion” thereof. In J&H Grading, the general contractor timely conducted its investigation and responded to the subcontractor’s § 27-1-15 demand in writing, but again, refused to issue payment on the basis of the pay-when-paid provision because it had not yet received payment from the owner.

Nearly a year after filing its mechanic’s lien, the owner issued payment directly to the subcontractor in a settlement. In the settlement agreement, the subcontractor expressly reserved its rights to pursue interest and attorneys’ fees against the general contractor based upon its unreasonable refusal to pay in violation of § 27-1-15. The Circuit Court ruled in favor of the subcontractor and found that it was entitled to recover its fees. On appeal, Judge Vinson, writing for the Court of Appeals, affirmed.

The Court concluded that while the general contractor could delay payment for a “reasonable time” on the basis of a pay-when-paid provision, any delay in payment of more than ninety (90) days was per se unreasonable. The Court expressly tied its definition of reasonableness to South Carolina’s mechanic’s lien deadline of 90 days from the last day of work, concluding that any delay in payment which forces a subcontractor to file a mechanic’s lien to protect its right to payment is unreasonable. The court dismissed the general contractor’s argument that its delay was reasonable because the general contractor had filed its own mechanic’s lien, which included the subcontractor’s amount owed, and a lawsuit foreclosing on the lien.

In reviewing whether the general contractor’s refusal to make payment was reasonable under § 27-1-15, the Court made clear that it was reviewing the general contractor’s actions at the time the subcontractor made demands for payment in connection with the Project, which was several months prior to the subcontractor’s official § 27-1-15 demand. Stated another way, the Court imposed attorneys’ fees and interest for the contractor’s unreasonable refusal to pay the subcontractor in 2017 based upon a statutory demand made in 2018.

Following J&H Grading, general contractors on South Carolina projects should avoid delaying payment based on a pay-when-paid clause any longer than the subcontractor has to file its mechanic’s lien in connection with the Project. The J&H Grading decision has significant implications to general contractors and subcontractors. Consider the following when contracting to perform work on Projects in South Carolina:  

  1. When drafting or negotiating a final payment provision for inclusion in a subcontract or purchase order which includes pay-when-paid language, alternate deadlines for final payment should be stated.  By way of example, the final payment provision at issue in J&H Grading should be revised along the following lines “Provided that the Subcontractor has submitted its final application for payment in accordance with the terms of the Subcontract, final payment of the balance due shall be made to [subcontractor] no later than seven (7) days after receipt by [general contractor] of final payment from Owner [for subcontractor’s] work or ninety (90) days after  [subcontractor’s] completion of the Work, whichever occurs first.”  (new language in bold). When drafting or negotiating prime contracts, general contractors should identify subcontractors who will likely complete performance of their subcontracts before final payment is due and include language providing for the release of payment, including associated retainage, for those subcontractors’ portions of the work under the prime contract.  Absent such provisions in the prime contract, the general contractor may be obligated to advance payment to a subcontractor in advance of receipt of final payment, including retainage, from the owner.
  2. General contractors may need to act before the forty-five (45) day deadline imposed by § 27-1-15 where the statutory demand is preceded by prior demands and discussions regarding payment.

If you have questions or concerns about what constitutes a “reasonable time” or a “reasonable and fair investigation” under South Carolina law, HLP attorneys can assist.

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