Contingent Payment Clauses: “Pay-When-Paid” vs. “Pay-If-Paid”
Kegler Brown Construction Newsletter January 1, 2013
"Pay-when-paid" subcontract clauses are structured in a way that payment from the general contractor to the subcontractor is conditioned upon prior receipt of payment from the owner to the general contractor. Ordinarily, the subcontract will state that payment is due to the subcontractor within a certain period of time after receipt by the general contractor of payment from the owner. Many courts have traditionally interpreted "pay-when-paid" provisions as an unconditional promise to pay, with the time of payment being postponed until the happening of a certain event, or after a reasonable period of time has elapsed if such event does not take place.
With increasing frequency, many general contractors have been inserting "pay-if-paid" provisions in their subcontracts, stating something to the effect that the subcontractor assumes the risk of non-payment by the owner and payment by the owner to the general contractor is a condition precedent to payment by the general contractor to the subcontractor. Words that tip subcontractors off to a potential “pay-if-paid” clause include “IF” and “CONDITION PRECEDENT”.
A “pay-if-paid” clause not only shifts the credit risk associated with the owner to the subcontractor but also the risk that the owner will not pay the contractor because of disputes involving performance wholly unrelated to the subcontractor’s scope of work (the roofer does not get paid because of a dispute with the excavator).
Court decisions in many states have upheld the validity of "pay-if-paid" provisions if they unambiguously express the intention of the parties to shift the credit risk to the subcontractor.
There is a growing legislative and judicial trend finding “pay-if-paid” provisions against public policy and unenforceable. For a current listing of those states, see “Contingent Payment in the 50 States” (ASA 2012) located on our website.