MidAmerica Construction Management, Inc. v. MasTec North America, Inc.

                                                                     F I L E D
                                                               United States Court of Appeals
                                                                       Tenth Circuit

                                                                    February 8, 2006
                                  PUBLISH
                                                                  Elisabeth A. Shumaker
                                                                      Clerk of Court
                  UNITED STATES COURT OF APPEALS

                                TENTH CIRCUIT



MIDAMERICA CONSTRUCTION
MANAGEMENT, INC., an Oklahoma
corporation,

      Plaintiff - Appellant,
v.
                                                    No. 04-6231
MASTEC NORTH AMERICA, INC.,
a Florida corporation, and
RENEGADE OF IDAHO, INC., an
Idaho corporation,

      Defendants - Appellees.


                Appeal from the United States District Court
                   for the Western District of Oklahoma
                         (D.C. No. CIV-03-1561-R)


Albert W. Murry, Murry Cox & Murry, Oklahoma City, Oklahoma, for Plaintiff-
Appellant.

Henry D. Hoss, McAfee & Taft, Oklahoma City, P.C., Oklahoma (Natalie K.
Ramsey, McAfee & Taft, Oklahoma City, Oklahoma, with him on the brief), for
Defendants-Appellees.
Before EBEL and TYMKOVICH, Circuit Judges, and BROWNING, District
Judge. *


EBEL, Circuit Judge.



      In this case, we must determine whether a contract between two defendant

general contractors and a plaintiff subcontractor requires the general contractors

to pay the subcontractor for the work the subcontractor performed only if the

general contractors are first paid on their own contract with the project owner. In

making this determination, we address the type of language that constitutes a

“pay-if-paid” clause under both Texas and New Mexico law in a contract for a

private-sector construction project.

      We AFFIRM the district court’s grant of summary judgment to Defendants

MasTec North America, Inc. (“MasTec”) and Renegade of Idaho, Inc.

(“Renegade”) on the claim of Plaintiff MidAmerica Construction Management,

Inc. (“MidAmerica”) that Defendants breached their contract with Plaintiff by

refusing to pay Plaintiff for the work Plaintiff performed under the contract. We

do so because we determine that (1) the contract contains a “pay-if-paid” clause;

(2) this clause is enforceable under both Texas and New Mexico law; and (3) as a



      *
        Honorable James O. Browning, District Court Judge, United States
District Court for the District of New Mexico, sitting by designation.

                                        -2-
result, Defendants need not at the present time pay Plaintiff for the work that

Plaintiff performed under the contract, because Defendants have not been paid by

project owner PathNet, Inc. (“PathNet”) for that work.

                                 BACKGROUND

      PathNet hired Defendant Renegade to help construct the New Mexico and

Texas portions of a fiber optic network. Defendant MasTec subsequently

purchased Renegade. On January 31, 2001, Defendants hired Plaintiff as a

subcontractor to help install a buried conduit for fiber optic line. The parties’

agreement was embodied in a written contract (the “Subcontract Agreement”).

      Plaintiff began performing under the Subcontract Agreement. Defendants

made an initial payment of approximately $127,000 to Plaintiff in March 2001 for

work performed in January and February of that year. However, after PathNet

filed for bankruptcy in April 2001, Defendants refused to make any further

payments to Plaintiff because Defendants asserted that they had not received

payment from PathNet for the work Plaintiff performed.

      In November 2003, Plaintiff brought suit against Defendants in the United

States District Court for the Western District of Oklahoma, contending that

Defendants owed it approximately $1.9 million for work performed under the

Subcontract Agreement. The district court denied Plaintiff’s motion for partial

summary judgment and granted Defendants’ counter-motion for summary


                                        -3-
judgment on all Plaintiff’s claims. Specifically, the district court held that a

provision in the Subcontract Agreement that provides that “all payments to

Subcontractor by Contractor are expressly contingent upon and subject to receipt

of payment for the work by Contractor from Owner,” was

      unambiguous and makes Defendants (Contractor) receipt of payment
      for the work from PathNet (Owner) a condition precedent to payment
      of Plaintiff (Subcontractor). Thus, unless and until Defendants
      receive payment for the work in question from PathNet, Defendants
      have no duty to pay Plaintiff and Plaintiff acquires no right to
      enforce the promise of payment.

The court stated that:

      applying either New Mexico or Texas law or the law of both states,
      the court enforces the contract as written and holds that Defendants
      have no obligation to pay Plaintiff unless or until PathNet pays
      Defendants.

The court also noted that:

      because the Subcontract Agreement provides that it “may not be
      amended except by a writing signed by each of the parties,” and may
      not be modified or waived except in writing signed by both parties,
      [Defendant’s] single payment to [Plaintiff] could not effect a
      modification or waiver of the payment term making payment of
      [Plaintiff] “expressly contingent upon and subject to receipt of
      payment” by Defendants from PathNet.

Finally, the court found that a “termination clause” in the Subcontract Agreement

also barred Plaintiff’s claims for breach of contract. 2


      2
        Plaintiff brought additional claims based on promissory estoppel, quantum
meruit, unjust enrichment, and account stated. The district court denied the
                                                                     (continued...)

                                         -4-
      Plaintiff appealed from the district court’s order and judgment.



                                   DISCUSSION

I.    Jurisdiction, Standard of Review, and Choice of Law

      Plaintiff’s notice of appeal was timely filed. See Fed. R. App. P.

4(a)(1)(A). We exercise appellate jurisdiction over its appeal pursuant to 28

U.S.C. § 1291, reviewing the district court’s grant of summary judgment de novo.

See Phillips v. New Hampshire Ins. Co., 263 F.3d 1215, 1218 (10th Cir. 2001).

      The Subcontract Agreement provides that the contract “is governed by the

laws of the state where the Work is/was performed.” It is undisputed that

Plaintiff performed work pursuant to the Subcontract Agreement in Texas and

New Mexico. Neither party asserts that only one of these two states’ law should

apply; rather, both parties assert that both states’ law should apply. Thus, if the

Subcontract Agreement’s choice-of-law clause is enforceable, we must apply both

Texas and New Mexico law in interpreting the agreement.

      In cases like this one, where subject matter jurisdiction is based on

diversity of citizenship, federal courts must look to the forum state’s choice-of-

law rules to determine the effect of a contractual choice-of-law clause. See Lyon



      2
       (...continued)
claims, and Plaintiff does not pursue them on appeal.

                                        -5-
Dev. Co. v. Bus. Men’s Assur. Co., 76 F.3d 1118, 1122 (10th Cir. 1996). Under

the law of the forum state in this case, Oklahoma, “a contract will be governed by

the laws of the state where the contract was entered into unless otherwise agreed

and unless contrary to the law or public policy of the state where enforcement of

the contract is sought.” Williams v. Shearson Lehman Bros., Inc., 917 P.2d 998,

1002 (Okla. Civ. App. 1995) (emphasis added). Because in this case the parties

agreed to be governed by the laws of Texas and New Mexico, we must determine

whether the application of those states’ laws to the interpretation of the

Subcontract Agreement would violate the law or public policy of Oklahoma as

expressed in the state’s constitution, statutes, or judicial records. See Oliver v.

Omnicare, Inc., 103 P.3d 626, 628-29 (Okla. Civ. App. 2004); see also Cameron

& Henderson, Inc. v. Franks, 184 P.2d 965, 972 (Okla. 1947).

      As is explained more fully below, we conclude that the Subcontract

Agreement contains a “pay-if-paid” clause that is enforceable under both Texas

and New Mexico law, making PathNet’s payment of Defendants a condition

precedent to Defendants’ obligation to pay Plaintiff. Enforcing this clause does

not yield a result that violates the law or public policy of Oklahoma. There are no

Oklahoma cases interpreting “pay-if-paid” clauses, see John B. Hayes, Survey of

Payment Provision and Trust Fund Statute: Oklahoma, 24 Construction Law. 20

(2004)—and thus there are no Oklahoma cases stating that Oklahoma does not


                                         -6-
enforce such clauses. One frequently-cited Tenth Circuit case applying Oklahoma

law, Byler v. Great Am. Ins. Co., 395 F.2d 273 (10th Cir. 1968), suggests that

Oklahoma courts would enforce a contractual provision that conditions payment

upon the happening of a future event—such as payment of a general contractor by

a project owner—if required to do so by plain and unambiguous contractual

language. See id. at 276-77; see also United States v. Mann, 197 F.2d 39, 40-42

(10th Cir. 1952); Moore v. Continental Cas. Co., 366 F. Supp. 954, 955-56 (W.D.

Okla. 1973). There is no constitutional or statutory prohibition against “pay-if-




                                        -7-
paid” clauses in Oklahoma. 3 Therefore, we apply Texas and New Mexico law in

interpreting the Subcontract Agreement.




      3
        As is explained more fully below, statutory prohibitions against “pay-if-
paid” clauses typically take one of two forms: an antiwaiver provision in a state’s
mechanic’s lien statute, or an outright ban on conditional payment provisions.
Some legislatures also restrict the application of “pay-if-paid” clauses in order to
permit subcontractors to pursue bond claims or lien actions. However, the
Oklahoma legislature has not adopted any such measures that relate to “pay-if-
paid” clauses in contracts for private-sector construction projects.
      In November 2004—after the parties entered into the Subcontract
Agreement, Plaintiff brought suit against Defendants, and the district court
granted summary judgment to Defendants—the Oklahoma legislature’s Fair Pay
for Construction Act took effect. See Okla. Stat. tit. 15, §§ 621-627 (2004),
renumbered as tit. 16, §§ 221-227 (2005). The act provides that:

      [t]he following are against the public policy of this state and are void
      and unenforceable:

             1. A provision, covenant, clause or understanding in, collateral
             to or affecting a construction contract that makes the contract
             subject to the laws of another state or that requires any
             litigation, arbitration or other dispute resolution proceeding
             arising from the contract to be conducted in another state; . . . .

Okla. Stat. tit. 15, § 627(B). We need not decide whether the act applies
retroactively to the Subcontract Agreement because the act provides that
“‘[c]onstruction contract’ means a written contract or subcontract awarded . . . for
the purpose of making any public improvements or constructing any public
building or making repairs to or performing maintenance on the same.” Id. tit.
15, § 622(1); tit. 16, § 222 (emphasis added). Thus, the act could not apply to the
Subcontract Agreement, which is for the purpose of constructing a private fiber
optic network.

                                         -8-
II.   The “Pay-if-Paid” Clause in the Subcontract Agreement

      A.     Legal and Contractual Framework

      Construction contracts often contain provisions referred to as “pay-when-

paid” and “pay-if-paid” clauses. See Robert F. Carney & Adam Cizek, Payment

Provisions in Construction Contracts and Construction Trust Fund Statutes: A

Fifty-State Survey, 24 Construction Law. 5 (2004). Courts have not uniformly

applied these terms. See id. (“Some courts refer to both provisions as ‘pay-when-

paid’ clauses . . . .”). Still, the terms “pay-when-paid” and “pay-if-paid” refer to

distinct types of contractual clauses:

             A typical “pay-when-paid” clause might read: “Contractor
      shall pay subcontractor within seven days of contractor’s receipt of
      payment from the owner.” Under such a provision in a construction
      subcontract, a contractor’s obligation to pay the subcontractor is
      triggered upon receipt of payment from the owner. Most courts hold
      that this type of clause at least means that the contractor’s obligation
      to make payment is suspended for a reasonable amount of time for
      the contractor to receive payment from the owner. The theory is that
      a “pay-when-paid” clause creates a timing mechanism only. Such a
      clause does not create a condition precedent to the obligation to ever
      make payment, and it does not expressly shift the risk of the owner’s
      nonpayment to the subcontractor. . . .

            A typical “pay-if-paid” clause might read: “Contractor’s
      receipt of payment from the owner is a condition precedent to
      contractor’s obligation to make payment to the subcontractor; the
      subcontractor expressly assumes the risk of the owner’s nonpayment
      and the subcontract price includes this risk.” Under a “pay-if-paid”
      provision in a construction contract, receipt of payment by the
      contractor from the owner is an express condition precedent to the
      contractor’s obligation to pay the subcontractor. A “pay-if-paid”
      provision in a construction subcontract is meant to shift the risk of

                                         -9-
      the owner’s nonpayment under the subcontract from the contractor to
      the subcontractor. In many jurisdictions, courts will enforce a
      “pay-if-paid” provision only if that language is clear and
      unequivocal. Judges generally will find that a “pay-if-paid”
      provision does not create a condition precedent, but rather a
      reasonable timing provision, where the “pay-if-paid” provision is
      ambiguous.

Id. at 5-6 (footnotes omitted).

      In this case, the Subcontract Agreement provides:

      Upon final acceptance of the Work by Contractor and Owner,
      Contractor will pay Subcontractor for the Work at the prices and
      schedule and in the manner described on the Work Order(s); provided
      that, all payments to Subcontractor by Contractor are expressly
      contingent upon and subject to receipt of payment for the Work by
      Contractor from Owner, even if (a) Contractor has posted a payment
      bond with Owner or (b) the Primary Contract is on a “cost plus” or
      other reimbursement basis requiring the Contractor to pay
      subcontractors prior to being reimbursed by Owner.

      B.     Interpretation Under Texas Law

      The Texas Supreme Court has not definitively determined where the line

between “pay-if-paid” and “pay-when-paid” clauses should be drawn. When the

highest court of a state whose law is being applied in a diversity case has not

decided the issue presented, we must determine what decision the court would

make if faced with the same facts and circumstances. See Progressive Cas. Ins.

Co. v. Engemann, 268 F.3d 985, 987 (10th Cir. 2001). In making that

determination, we may “consider a number of authorities, including analogous

decisions by the state Supreme Court, the decisions of the lower courts in the


                                       - 10 -
state, the decisions of the federal courts and of other state courts, and the general

weight and trend of authority.” Id. at 988 (quotations and alteration omitted).

“[W]here jurisdiction rests solely on diversity of citizenship and there is no

controlling decision by the highest court of a state, a decision by an intermediate

court should be followed by the Federal court, absent convincing evidence that

the highest court of the state would decide otherwise.” Webco Indus., Inc. v.

Thermatool Corp., 278 F.3d 1120, 1132 (10th Cir. 2002) (quotations and

alteration omitted).

      In Gulf Construction Co. v. Self, 676 S.W. 2d 624 (Tex. Ct. App. 1984),

the Texas Court of Appeals stated:

      A condition precedent may be either a condition to the formation of a
      contract or to an obligation to perform an existing agreement.
      Conditions may, therefore, relate either to the formation of contracts
      or liability under them. Conditions precedent to an obligation to
      perform are those acts or events, which occur subsequently to the
      making of the contract, that must occur before there is a right to
      immediate performance and before there is a breach of contractual
      duty. While no particular words are necessary for the existence of a
      condition, such terms as “if,” “provide that,” “on condition that,” or
      some other phrase that conditions performance, usually connote an
      intent for a condition rather than a promise. In the absence of such a
      limiting clause, whether a certain contractual provision is a
      condition, rather than a promise, must be gathered from the contract
      as a whole and from the intent of the parties. . . . [W]here the intent
      of the parties is doubtful or where a condition would impose an
      absurd or impossible result, then the agreement should be interpreted
      as creating a covenant rather than a condition. Also, it is a rule of
      construction that a forfeiture, by finding a condition precedent, is to
      be avoided when possible under another reasonable reading of the
      contract. . . . The rule . . . is that:

                                         - 11 -
             Since forfeitures are not favored, courts are inclined to
             construe the provisions in a contract as covenants rather
             than as conditions. If the terms of the contract are fairly
             susceptible of an interpretation which will prevent a
             forfeiture, they will be so construed.

      Generally, a writing is construed most strictly against its author and
      in such a manner as to reach a reasonable result consistent with the
      apparent intention of the parties.

Id. at 627-28 (citations omitted); see also Criswell v. European Crossroads

Shopping Ctr., Ltd., 792 S.W. 2d 945, 948 (Tex. 1990) (laying out the interpretive

approach to be used in resolving a dispute between an owner and an engineer

using nearly identical language).

      In this case, as noted above, the Subcontract Agreement provides that “all

payments to Subcontractor by Contractor are expressly contingent upon and

subject to receipt of payment for the Work by Contractor from Owner, even if . . .

the Primary Contract is on a ‘cost plus’ or other reimbursement basis requiring the

Contractor to pay subcontractors prior to being reimbursed by Owner.” The

Subcontract Agreement contains the necessary conditional language to make

PathNet’s payment of Defendants a condition precedent to Defendants’ obligation

to pay Plaintiff. Instead of using timing-related terms like “until,” which are

indicative of a “pay-when-paid” clause, cf. Self, 676 S.W. 2d at 627, the

Subcontract Agreement uses phrases associated with conditionality. Indeed, the

phrases “expressly contingent upon” and “subject to” in the Subcontract


                                        - 12 -
Agreement are similar to the words “if,” “provide that,” and “on condition that”

cited in Self as being indicative of the creation of a condition precedent. See

Black’s Law Dictionary (8th ed. 2004) (defining “contingent” as “[d]ependent on

something else; conditional”); see also A.J. Wolfe Co. v. Baltimore Contractors,

244 N.E. 2d 717, 720-21 (Mass. 1969) (“In the absence of a clear provision that

payment to the subcontractor is to be directly contingent upon the receipt by the

general contractor of payment from the owner, such a provision should be viewed

only as postponing payment by the general contractor for a reasonable time after

requisition . . . .”) (emphasis added). While the Subcontract Agreement might

have been more explicit, cf. Carney & Cizek, supra (noting that a typical “pay-if-

paid” clause might state that “the subcontractor expressly assumes the risk of the

owner’s nonpayment and the subcontract price includes this risk”), the

Subcontract Agreement’s failure to say all that it might have said is not enough to

throw the intent of the contracting parties into doubt. Cf. Self, 676 S.W. 2d at

628.

       Though it did so only in passing, the Texas Supreme Court recently cited

Self approvingly, suggesting that the Texas Supreme Court would use the Self

approach in construing the Subcontract Agreement. See Interstate Contracting

Corp. v. City of Dallas, 135 S.W. 3d 605, 618 (2004) (stating that Self holds that




                                        - 13 -
“unless there is an express contractual provision to the contrary, a contractor is

ultimately responsible for payment of its subcontractors”) (emphasis added).

      Case law from other jurisdictions does not provide “convincing evidence,”

Thermatool Corp., 278 F.3d at 1132, that the Texas Supreme Court would not

employ the Self approach. In Thomas J. Dyer Co. v. Bishop International

Engineering Co., 303 F.2d 655, 661 (6th Cir. 1962)—the seminal case on the

enforceability of “pay-if-paid” or “pay-when-paid” clauses—the Sixth Circuit

stated:

      Normally and legally, the insolvency of the owner will not defeat the
      claim of the subcontractor against the general contractor.
      Accordingly, in order to transfer this normal credit risk incurred by
      the general contractor from the general contractor to the
      subcontractor, the contract between the general contractor and
      subcontractor should contain an express condition clearly showing
      that to be the intention of the parties.

Id. at 660-61; see also Lafayette Steel Erectors, Inc. v. Roy Anderson Corp., 71 F.

Supp. 2d 582, 587 (S.D. Miss. 1997) (“Dyer has been cited and relied upon

repeatedly . . . .”); Mrozik Constr., Inc. v. Lovering Assocs., Inc., 461 N.W. 2d

49, 51 (Minn. Ct. App. 1990) (describing Dyer as “a leading case on which the

Restatement [(Second) of Contracts] illustration was based”); Watson Constr. Co.

v. Reppel Steel & Supply Co., 598 P.2d 116, 119 (Ariz. Ct. App. 1979) (terming

Dyer “a leading decision in this area”); David R. Hendrick, John I. Spangler, III,

& Robert B. Wedge, Battling for the Bucks: The Great Contingency Payment


                                        - 14 -
Clause Debate, 16 Construction Law. 12, 17 (1996) (“The Dyer/Restatement

approach has been adopted in the majority of jurisdictions . . . .”). The fact that

the approach used in Dyer and its progeny is similar to the Self approach lends

credence to the conclusion that the Texas Supreme Court would employ the Self

approach.

      Case law from jurisdictions that employ an approach that approximates the

Self approach suggests that the Texas Supreme Court would use the Self approach

to find that the “expressly contingent” clause in the Subcontract Agreement

constitutes a “pay-if-paid” clause, rather than a “pay-when-paid” clause.

Compare Robert F. Wilson, Inc. v. Post-Tensioned Structures, Inc., 522 So. 2d 79,

80 (Fla. Dist. Ct. App. 1988) (finding a condition precedent in contract stating

that “final payment is contingent upon payment to the Contractor” and that “[i]n

the event a controversy occurs between the Owner and the General Contractor

concerning the Contract with the Owner . . . no compensation for these items shall

be due the Subcontractor from the Contractor until payment for them is received

by the Contractor”) (quotations and emphasis omitted), with Moore, 366 F. Supp.

at 955-56 (noting that no condition precedent was created by a contract stating

that “Sub-Contractor will be paid in payments as and when Contractor receives

payments from the Owner . . . and where payments are made by the Owner upon

estimates or for percentages of work completed, Sub-Contractor shall then receive


                                        - 15 -
his proportionate part thereof. . . . The retained or remaining percent shall be paid

after final estimate is made and after the architect and the Owner has certified

their satisfaction as to the completion of this sub-contract, and after the

Contractor has been paid by the Owner.”) (quotations omitted), Peacock Constr.

Co. v. Modern Eng’g, Inc., 353 So. 2d 840, 841-43 (Fla. 1977) (noting that no

condition precedent was created by a contract stating that the general contractor

“would make final payment to the subcontractors, ‘within 30 days after the

completion of the work included in this sub-contract, written acceptance by the

Architect and full payment therefor by the Owner’”), and Watson, 598 P.2d at 120

(finding that no condition precedent was created by a contract stating that “‘THE

CONTRACTOR AGREES . . . to pay the Sub-Contractor, promptly upon receipt

thereof from the Owner, the amount received by the Contractor on account of the

Sub-Contractor’s work to the extent of the Sub-Contractor’s interest therein. . . .

At all times subcontractor shall be paid to the extent that the contractor has been

paid on his account.’”).

      Thus, the clear conditional language in the Subcontract Agreement marks it

as a “pay-if-paid” clause enforceable under Texas law. As such, we hold that

under Texas law Defendants are not obligated to pay Plaintiff for the work that

Plaintiff performed under the Subcontract Agreement unless and until PathNet

pays Defendants for that work.


                                         - 16 -
      C.     Interpretation Under New Mexico Law

      No New Mexico court has yet determined the enforceability of a “pay-if-

paid” or “pay-when-paid” provision. Both parties contend that a recent New

Mexico statute—the Retainage Act, N.M. Stat. Ann. §§ 57-28-1–57-28-11—sheds

light on the way that the New Mexico Supreme Court would interpret the

Subcontract Agreement. The Retainage Act states, in pertinent part, that:

      all construction contracts shall provide that payment for amounts
      due, except for retainage, shall be paid within twenty-one days after
      the owner receives an undisputed request for payment. . . . All
      construction contracts shall provide that contractors and
      subcontractors make prompt payment to their subcontractors and
      suppliers for amounts owed for work performed on the construction
      project within seven days after receipt of payment from the owner,
      contractor or subcontractor. . . . These payment provisions apply to
      all tiers of contractors, subcontractors, and suppliers.

N.M. Stat. Ann. § 57-28-5(A), (C).

      Plaintiff argues that because the Retainage Act mandates prompt payment

to subcontractors, New Mexico would be likely to find that a “pay-if-paid” clause

in a contract for a private-sector construction project—a clause that might

interfere with payments to subcontractors—is against public policy. Defendants

argue that the text of the act, by including the phrase “after receipt of payment

from the owner,” endorses contingent payments.

      However, the fact that the New Mexico legislature has enacted this

provision sheds little light on whether a New Mexico court would enforce a


                                        - 17 -
bargained-for “pay-if-paid” clause in a contract for a private-sector construction

project. See Statesville Roofing & Heating Co. v. Duncan, 702 F. Supp. 118, 122

(W.D.N.C. 1988) (noting that a prior version of North Carolina’s equivalent of

the Retainage Act “addresses only the issue of what is to be done when the

general [contractor] has already been paid. It says nothing about what happens

when the owner does not pay.”). 4

      Thus, we must look outside New Mexico for guidance on how the New

Mexico Supreme Court would interpret the Subcontract Agreement. As noted

above, the general weight and trend of authority holds that enforceable “pay-if-

paid” clauses may be created in contracts for private-sector construction projects

by using language clearly indicating the intent to create a condition precedent.

See also Richard A. Lord, 8 Williston on Contracts § 19:58 (2004) (“[I]t has long

been the rule that, if the parties clearly do intend that the risk of nonpayment be

borne by the subcontractor, and clearly express that intent by making the right of

the subcontractor to be paid expressly conditional on the receipt of such payment

by the contractor from the owner, they may by contract allocate that risk, and the

courts will enforce that freely bargained-for allocation of risk.”). Only a handful


      4
       Neither party contends that the Texas equivalent of the Retainage Act,
Tex. Prop. Code Ann. §§ 28.001–28.010, sheds light on the way that the Texas
Supreme Court would interpret the Subcontract Agreement. If the parties were to
make such an argument, the argument would fail for the reasons discussed in
connection with this analysis of the New Mexico Retainage Act.

                                        - 18 -
of states have determined that clearly drafted “pay-if-paid” clauses in contracts

for private-sector construction projects are not enforceable on public policy

grounds. Since it appears that the New Mexico Supreme Court would not find a

clearly drafted “pay-if-paid” clause in a contract for a private-sector construction

project unenforceable for the reasons expressed by these other states, it follows

that the New Mexico Supreme Court likely would find the “pay-if-paid” clause in

the Subcontract Agreement to be enforceable under New Mexico law. See

Hendrick, Spangler & Wedge, supra, at 23 (“[E]xcept for those states where

conditional payment provisions are unenforceable as a matter of public policy, a

conditional payment provision will be enforced if the clause utilizes the term

‘condition’ or ‘condition precedent,’ and if it is clear and unambiguous that the

subcontractor assumed the risk of owner nonpayment.”); see also id. at 27

(“Except for the jurisdictions which have, by statute, barred conditional payment

provisions, all courts enforce ‘pay-if-paid’ clauses, particularly where they are

unambiguous, and clearly provide that payment from the owner is a condition

precedent to payment to the subcontractor.”).

      The highest courts in two states have voided “pay-if-paid” provisions in

contracts for private-sector construction projects as against public policy because

such clauses violate the antiwaiver protections in the states’ mechanic’s lien

statutes. See William R. Clarke Corp. v. Safeco Ins. Co., 938 P.2d 372, 374 (Cal.


                                        - 19 -
1997) (“[P]ay if paid provisions . . . are contrary to the public policy of this state

and therefore unenforceable because they effect an impermissible indirect waiver

or forfeiture of the subcontractors’ constitutionally protected mechanic’s lien

rights in the event of nonpayment by the owner.”); West-Fair Elec. Contractors v.

Aetna Cas. & Sur. Co., 661 N.E.2d 967, 971 (N.Y. 1995) (“[A] pay-when-paid

provision which forces the subcontractor to assume the risk that the owner will

fail to pay the general contractor is void and unenforceable as contrary to public

policy set forth in the Lien Law § 34 [which states that ‘any contract, agreement

or understanding whereby the right to file or enforce any [mechanic’s] lien . . . is

waived, shall be void as against public policy and wholly unenforceable’].”).

However, because New Mexico does not have an express antiwaiver provision in

its mechanic’s lien laws, cf. N.M. Stat. Ann. § 48-2A-12(B) (referring to a

“signed waiver of lien”), the reasoning in Clarke and West-Fair does not apply.

See 3 Philip L. Bruner & Patrick J. O’Connor, Jr., Bruner and O’Connor on

Construction Law, § 8:49 (2005); cf. Dayside, Inc. v. First Judicial District Court,

75 P.3d 384, 386-87 (Nev. 2003) (“Some state legislatures have declared a lien

waiver to be against public policy. But other state legislatures have expressly

permitted waivers. . . . Absent a prohibitive legislative proclamation, a waiver of

mechanic’s lien rights is not contrary to public policy.”) (footnotes omitted).




                                         - 20 -
       Some state legislatures have prohibited conditional payment provisions in

contracts for private-sector construction projects. See N.C. Gen. Stat. § 22C-2

(“Payment by the owner to a contractor is not a condition precedent for payment

to a subcontractor and payment by a contractor to a subcontractor is not a

condition precedent for payment to any other subcontractor, and an agreement to

the contrary is unenforceable.”); Wis. Stat. § 779.135(3) (rendering void

“[p]rovisions making a payment to a general contractor from any person who does

not have a contractual agreement with the subcontractor or supplier a condition

precedent to a general contractor’s payment to a subcontractor or a supplier”).

However, the New Mexico legislature has enacted no statutory measure analogous

to those adopted by these other states. In the absence of guidance from the New

Mexico legislature, we decline to craft a state policy prohibiting the use of clearly

worded “pay-if-paid” clauses.

       Thus, it appears that the New Mexico Supreme Court would interpret the

Subcontract Agreement as containing an enforceable “pay-if-paid” clause and

would enforce the clear condition in this contract as drafted by the parties. As

such, we hold that under New Mexico law Defendants are not obligated to pay

Plaintiff for the work that Plaintiff performed under the Subcontract Agreement

unless and until PathNet pays Defendants for that work.

III.   Defendants’ Partial Payment to Plaintiff


                                        - 21 -
      Plaintiff argues that a partial payment that Defendants made to Plaintiff

establishes that the parties intended that Plaintiff should be paid regardless of

whether Defendants were paid by PathNet. Plaintiff’s argument fails under both

Texas and New Mexico law.

      Under Texas law,

      [i]f a written contract is worded so that it can be given a definite or
      certain legal meaning, then it is unambiguous. An ambiguity does
      not arise simply because the parties offer conflicting interpretations.
      Rather, a contract is ambiguous only if two or more meanings are
      genuinely possible after application of the pertinent rules of
      interpretation to the face of the instrument. Parol evidence is not
      admissible for the purpose of creating an ambiguity. Only when a
      contract is first determined to be ambiguous may the court admit
      extraneous evidence to determine the true meaning of the instrument.

Coastal Mart, Inc. v. Southwestern Bell Telephone Co., 154 S.W.3d 839, 843

(Tex. App. 2005). In this case, the Subcontract Agreement’s consideration of

whether payment from PathNet is a condition precedent to Defendants’ obligation

to pay Plaintiff “can be given a definite or certain legal meaning.” Thus, under

Texas law external evidence like the partial payment may not be considered in

interpreting the alleged “pay-if-paid” clause in the agreement.

      Under New Mexico law:

      [a]n ambiguity exists in an agreement when the parties’ expressions
      of mutual assent lack clarity. The question whether an agreement
      contains an ambiguity is a matter of law to be decided by the trial
      court. The court may consider collateral evidence of the
      circumstances surrounding the execution of the agreement in
      determining whether the language of the agreement is unclear. If the

                                        - 22 -
      evidence presented is so plain that no reasonable person could hold
      any way but one, then the court may interpret the meaning as a matter
      of law.

Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (N.M. 1993) (citations omitted).

Because the partial payment made here was not part of the circumstances

surrounding the execution of the contract, this post-formation conduct would not

be considered by New Mexico for the purposes of creating an ambiguity under the

contract. In any event, that payment does not shed light on Defendants’ intent in

contracting. The fact that Defendants made a single partial payment to Plaintiff

before receiving payment from PathNet may be attributable to a host of factors,

including a desire to maintain a cooperative working relationship with Plaintiff,

provide an incentive for Plaintiff’s continued performance, or allow Plaintiff

operating capital to purchase supplies. Defendants’ single partial payment does

not signal a desire on the part of Defendants to be liable for all payments to

Plaintiff even if PathNet did not pay Defendants. The payment neither creates an

ambiguity in the agreement nor provides evidence of the parties’ intent sufficient

to overcome the indication of Defendants’ intent expressed in the plain text of the

Subcontract Agreement.

      Therefore, the partial payment that Defendants made to Plaintiff does not

establish that the parties intended that Plaintiff should be paid regardless of

whether Defendants were paid by PathNet. As such, the payment does not disturb


                                        - 23 -
our conclusion that under both Texas and New Mexico law Defendants are not

obligated to pay Plaintiff for the work that Plaintiff performed under the

Subcontract Agreement unless and until PathNet pays Defendants for that work. 5



      Plaintiff does not raise the argument that the partial payment modified or
      5

waived the alleged “pay-if-paid” clause, stating in its brief that:

      [Defendants] . . . and the district court . . . discuss this [partial
      payment] issue in terms of waiver and rely on the provision in the
      Subcontract Agreement providing that the contract “may not be
      amended except by a writing . . . .” . . . However, [Plaintiff]’s
      argument in this regard is not based on waiver. Rather, [Plaintiff]
      asserts only that the payment is evidence of the parties’ intent and
      their interpretation of their obligations pursuant to the Subcontract
      Agreement and the provision for payment contained in the work
      order.

Accordingly, we need not consider this issue. Even if we were to consider
whether the payment modified the Subcontract Agreement, we would find, like
the district court, that

      because the Subcontract Agreement provides that it “may not be
      amended except by a writing signed by each of the parties,” and may
      not be modified or waived except in a writing signed by both parties,
      Defendants’ single payment to Plaintiff could not effect a
      modification or waiver of the payment term making payment of
      Plaintiff “expressly contingent upon and subject to receipt of
      payment” by Defendants from PathNet.

       To the extent that Plaintiff argues that a work order issued by Defendants to
Plaintiff modifies or waives the “pay-if-paid” clause in the Subcontract
Agreement, that argument is without merit. The fact that the work order does not
reiterate the “pay-if-paid” clause, and instead states only that Plaintiff must
present a release of lien before final payment will be made, does not undercut the
condition precedent created by the “pay-if-paid” clause. In general such an order
does not alter the main terms of the contract, but rather serves as an execution
                                                                         (continued...)

                                        - 24 -
IV.   The “Termination Clause” in the Subcontract Agreement

      Our conclusion that the parties intended PathNet’s payment of Defendants

to be a condition precedent to Defendants’ obligation to pay Plaintiff is buttressed

by an additional clause in the Subcontract Agreement that provides:

      If the Primary Contract to which a Work Order refers is terminated,
      suspended or delayed for any reason . . . . Subcontractor will only be
      entitled to recover from Owner such amounts as are payable to
      Contractor for the portion of the Work completed by Subcontractor,
      less Contractor’s anticipated gross profit from the work.
      Subcontractor is not entitled to mobilization, start-up, demobilization
      or other amounts, or consequential, special, incidental, liquidated or
      punitive damages, or for commercial loss or lost profits, unless such
      amounts or damages are awarded to Contractor, in which case
      Subcontractor may recover such amounts or damages for the portion
      of the Work completed by Subcontractor less the same percentage
      constituting Contractor’s gross profit retained by Contractor from all
      other amounts payable by Owner. Subcontractor will not be entitled
      to any other remedy for a termination, suspension or delay under this
      Section . . . including any amounts directly from Contractor.
      (Emphasis added.)

      We need not and do not consider whether this provision—which the court

below characterized as a “termination clause”—is sufficient on its own to

constitute an enforceable “pay-if-paid” clause. Rather, the termination clause


      5
        (...continued)
document under the contract. For a work order to alter a condition precedent to
payment under a contract, the order must contain a more direct expression of an
intent to modify those terms than does the work order in this case. Any tension
between the work order’s requirement that Plaintiff present a release of lien
before receiving final payment, and the original contract’s statement that Plaintiff
waived all lien rights on signing the contract, is irrelevant for purposes of
interpreting the”pay-if-paid” clause.

                                       - 25 -
sheds light on the parties’ intent in agreeing to the “expressly contingent”

language in the “pay-if-paid” provision discussed above. The termination clause

makes clear that following the termination, suspension, or delay of the contract

between PathNet and Defendants, Plaintiff’s remedy under nearly all

circumstances is to seek reimbursement from PathNet—not Defendants. 6 There is

no definition in the Subcontract Agreement for the phrase “terminated, suspended

or delayed,” nor are the words used in the phrase defined individually. However,

the fact that the phrase is part of the larger expression “terminated, suspended or

delayed for any reason” makes clear that the phrase is to be given a broad

reading. Thus, the termination clause was triggered by PathNet’s breach of its

contract with Renegade based on PathNet’s bankruptcy, even though PathNet did

not formally negotiate an end to the contract. Therefore, the termination clause

supports our conclusion that since PathNet terminated its contract with

Defendants without paying Defendants for Plaintiff’s work, Plaintiff cannot now

seek to recover from Defendants the amount that Plaintiff asserts it is owed.

                                  CONCLUSION



      6
         Based on the termination clause, it is at least arguable that Plaintiff should
be able to seek a recovery directly from Defendants if Defendants are awarded
mobilization, start-up, demobilization or other amounts, or consequential, special,
incidental, liquidated or punitive damages, or commercial loss or lost profits.
However, we need not conclusively determine whether this is the case because
there is no indication in the record that Defendants were awarded such sums.

                                        - 26 -
For the foregoing reasons, we AFFIRM the judgment of the district court.




                               - 27 -