Michigan Court Upholds “Pay When Paid” Clause
Kegler Brown Construction Newsletter November 1, 1995
In a ruling adverse to subcontractors, the Michigan Court of Appeals has upheld a "pay when paid" provision in a subcontract that made payment by the owner to the contractor a "condition precedent" to payment to the subcontractor. Christman v. Brown, 533 N.W.2d 838 (1995). This means that payment from the contractor to the subcontractor may be postponed indefinitely.
Courts have traditionally looked disfavorably upon contingent payment clauses due to the perceived disparity in bargaining power between contractors and subcontractors and the practical difficulty for subcontractors in obtaining information on the owner's financial condition.
The Michigan Court refused to find, as an Ohio Court has previously, that a "reasonable time" for payment is inferred in such a "pay when paid" clause. Instead the Court ruled that when the contract contained no express language limiting the "pay when paid" condition precedent to a reasonable time, the contractor fulfilled his obligations by trying to collect the money due from the owner.
The presence of the "condition precedent" language in this subcontract appeared to play a large role in the court's decision.
This decision reinforces the need for subcontractors to closely scrutinize contingent payment clauses and the risk associated with them, unless and until the Ohio legislature makes such provisions void and unenforceable.