Chapter 18 - § 18.5 • CONDITIONS PRECEDENT

• Jurisdiction: Colorado

§ 18.5 • CONDITIONS PRECEDENT

A "condition" is "[a] future and uncertain event on which the existence or extent of an obligation or liability depends; an uncertain act or event that triggers or negates a duty to render a promised per-formance."⁷⁴ A "condition precedent" is "[a]n act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises."⁷⁵ Conditions precedent are not favored and will not be enforced unless created by clear and unequivocal language.⁷⁶ If doubt exists as to the parties' intent, a clause will be interpreted as a promise rather than a condition.⁷⁷ This principle is based on the policy "of avoiding the harsh results of forfeiture against a party who has no control over the occurrence of the condition."⁷⁸ With respect to construction contract issues, a number of disputes have arisen as to whether certain language constitutes a condition precedent.

§ 18.5.1-Pay-When-Paid/Pay-if-Paid

Generally, the failure of an owner to pay a general contractor does not modify the contractor's obligation to pay its subcontractors.⁷⁹ Thus, the risk of non-payment is on the general contractor. However, by contract, a contractor and subcontractor can agree that receipt of payment from the owner is a condition precedent to the contractor's obligation to pay the subcontractor.⁸⁰ A pay-if-paid clause must be clear and explicit that receipt of payment from the owner is a condition precedent and that the subcontractor bears the risk of loss in the event the owner does not pay the contractor and any doubt will be resolved in favor of a promise rather than a condition.⁸¹ If sufficiently explicit language is not included in the contract, the clause will be considered a pay-when-paid clause that does not excuse the contractor's obligation to pay the subcontractor.⁸² Typically, payment clauses that create a condition precedent use that term or other language that provides that the owner's potential inability to pay the contractor was reasonably foreseeable and that the provision was intended to address this potentiality.⁸³ Therefore, in order to avoid having a payment provision later construed as a promise rather than a condition based on the strong policy against finding that contract language creates a condition, contractors should forego using language other than "condition precedent" in their subcontracts. Further, their subcontracts should explicitly state that the subcontractor bears the risk of any non-payment by the owner. If a valid and enforceable pay-if-paid clause exists, the risk of non-payment is shifted from the general contractor to its subcontractors.⁸⁴ For this reason, subcontractors and suppliers should not agree to such provisions unless absolutely required to do so.

§ 18.5.2-Final Payment

Certain contract language has been construed to constitute a condition precedent to a contractor's entitlement to final payment.⁸⁵ In N.R. Nielsen & Son, Contractors, Inc. v....