Gulf Construction v Self
Ct. of App TX [1984]
Author: Sam Biers

Types of Conditions-Conditions of Satisfaction

Relevant Facts: Df/ant Gulf, a gen contractor entered into two K with owner Good Hope to build several building at its plant site.  Gulf then entered into 3 subcontracts w/ Pls, Shaw, Self, and Industrial.  During the construction, the owner, Good Hope, encountered financial problems and directed that the work stop.  Afterward the subs demanded payment from Gulf for the work performed, and filed liens to that effect.  When Gulf refused and failed to pay the subs filed suit.

Legal Issue(s): Whether the subcontract provision stating, "Under no circumstances shall the general contractor be obligated or required to advance or make payments to the subcontractor until the funds have been advanced or paid by the owner or his representative to the general contractor," was established as a condition precedent to payment or a covenant dealing w/ the terms of payment or manner of payment?

Court’s Holding: Covenant dealing with the terms of payment or manner of payment.

Procedure: Bench trial ruled in favor of Pl/ee; and against df/ant; Affirmed.

Law or Rule(s):  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.

Court Rationale: Where the intent of the parties is doubtful or where a condition would impose an absurd or impossible result, the K should be interpreted as creating a covenant.  The first sentence of the 9^th paragraph, by itself, does not set forth a condition precedent to Gulf’s obligation to make payment but sets forth only a covenant regarding the terms of payment or manner of payment. It is basic in the construction business for the General to expect to be paid in full by the owner for the labor and material he puts into the project. Insolvency of the owner does not defeat the claim of the subcontractor against the general.  The provision requiring the subcontractor to wait to be paid for an indefinite period of time until the general contractor has been paid by the owner is to give the K provision an unreasonable construction which the parties did not intend at the time the subcontract was entered into. The Second sentence of the 9^th paragraph is in the nature of a modification of the time provision which immediately proceeds it in the 1^st sentence.

Plaintiff’s Argument: The provision is a covenant and not a condition.  It would be absurd to believe that a subcontractor would enter a K believing it would not be paid by the general k.

Defendant’s Argument: Gulf is under no obligation to pay, pursuant to the 9^th paragraph of the subcontract, the balance owed because the owner is unable to pay.

Risk of nonpayment by an owner on a construction contract rests on the contractor who contracts with such owner rather than on a subcontractor who has no privity of contract with the owner; and the risk does not shift to the subcontractor unless there is a clear, unequivocal and expressed agreement between the parties to do so.