Texas Construction Law Blog

Contingent payment clauses are often used in connection with contracts between general contractors and subcontractors or subcontractors and lower tiered subcontractors. Essentially, this type of clause provides that a general contractor does not owe a subcontractor unless the owner has paid the general contractor for the amounts due to the subcontractor.                                                                                                            

Unconscionability Prohibition

Section 56.054(a) of the Texas Business and Commerce Code makes contingent-payment clauses unenforceable if the application of the clause “would be unconscionable.” The statute explains when a contingent payment clause is “not” unconscionable. Tex. Bus. & Com. Code Ann. § 56.054(d), but until now, there was not much guidance on what that entailed. Recently, the Fourteenth Appeals Court in Houston found that a contingent payment clause was unenforceable under the statutory scheme because it was unconscionable. Solorzano v. Sage Commercial Group LLC, 693 S.W.3d 689, 694–95 (Tex. App.—Houston [14th Dist.] 2024, pet. denied).

Solorzano v. Sage Commercial Group LLC

In this case, Solorzano, a subcontractor, entered into an agreement with Sage, a general contractor. The agreement included a contingent-payment clause, which stipulated that Solorzano would be paid only after Sage received payment from the owner of the property. However, Western Spherical, who was supposed to be the owner, never actually owned the property, and the deal to purchase it fell through due to funding issues. Consequently, Sage was never paid by Western Spherical, and Solorzano was not paid for his work. 

The court examined the effect of Texas Business and Commerce Code § 56.054 concluding that Solorzano demonstrated his burden to show that the contingent payment clause was unenforceable because Sage “did none of the things required by statute to avoid the conclusion of unconscionability” including for example that Sage made no efforts to (i) research and communicate in writing to Solorzano the financial viability of the owner and the owner’s ability to pay;  (ii) collect the amount owed to Solorzano; or (iii) assign a claim against the owner. Solorzano, 693 S.W.3d at 695. More succinctly, the Court held “section 56.054 makes clear that a general contractor must exercise diligence with respect to each contract on which it seeks to enforce a contingent-payment clause.” Id. at 696.

Conclusion

In short, general contractors looking to enforce contingent payment clauses need to be familiar with this case on the front end of projects to avoid the risks that arise with owner non-payment. On the other side of the coin, subcontractors may look to this case in instances where a general contractor has not paid amounts owed to the subcontractor due to the owner’s financial inability to pay.