ConstructionPro Week, Volume: 6 - Issue: 5 - 02/03/2017

Should “Pay-If-Paid” Clauses Be Enforceable?

By Bruce Jervis

 

The enforceability of “pay-if-paid” clauses in subcontracts has been litigated extensively. The clauses are controversial because they purport to shift the risk of project owner nonpayment from the prime contractor, which has a contract with the owner, to subcontractors, which do not. Many feel this is unfair and reflects nothing more than the superior economic leverage of prime contractors over their subs.

 

In some jurisdictions, pay-if-paid clauses have been rendered unenforceable by judicial ruling or legislation. But the clauses are alive and well in many jurisdictions. A recent ruling by a Maryland court, applying Virginia law, indicated that the clauses, if properly drafted, are enforceable against subcontractors in both those states.

 

The draftsmanship in itself is problematic. The inclusion of legal terms of art can render an otherwise unenforceable clause enforceable. But the public policy issues are broader. Is the inclusion of a pay-if-paid clause simply a matter of arms length bargaining and contractual allocation of risk? Or, is it an overreach by general contractors who frequently gain their economic leverage by doing business with taxpayer-supported public project owners? Comments are welcomed.

 

COMMENTS

I'm glad your posted this, it seem like the subs are always behind the eight ball. What can we do to level the playing field without the subs there will be no prime.
Posted by: Eric Jackson - Friday, February 03, 2017 8:06 AM


I have a project here in California that started off good but now I am having issues getting paid due to this paid when paid is this enforceable here in California.

Have a nice day!
Posted by: Mike - Friday, February 03, 2017 8:08 AM


Don't feel alone in this issue. Consulting engineers working for architects are also exposed to this same problem. Owners who feel that they can just walk away from their obligations are the usual (but not exclusive, I would agree)root cause of our consternation. The principal focus needs to be on THAT problem.
Posted by: P Jardieu - Friday, February 03, 2017 8:40 AM


The typical subcontract shifts all kinds of risks to the subcontractor on issues that the subcontractor has little ability to control. Pay-if-paid is just one of many. Other such risk shifting is seen in indemnity clauses, additional insured provisions, obligation to remove lower tier mechanic's lien even when sub has not been paid, etc. All of this is patently unfair to subcontractors. it is good to see some states are trying to correct some of these abuses. Ultimately, fairer contracts promote better projects because risk is shifted to the parties who have some ability to control the relevant issues.
Posted by: Tom Hughes - Friday, February 03, 2017 8:59 AM


I represent a GC, so I see both sides. I am not convinced that this type of risk-shifting clause is patently unfair. Remember, if the owner doesn't pay the GC, the GC isn't getting paid either for self-performed work. Why should the GC have to take all the risk when the benefit belongs to the owner? Further, subs have the added protection of a payment bond. Any risk the sub assumes should be built into its price.
Posted by: KAMcLean - Friday, February 03, 2017 9:48 AM


Contractors at all tiers price risk. Prime contractors are not banks who finance the work, and if a prime has not been paid, it's logical that the risk of non-payment flows to tiers below. Of course, contractors at all tiers may have other remedies pursuant to Prompt Payment Statutes to compel payment (whether from the Owner or the Prime or any subtier) and those can prove effective in addressing dilatory payment processing. In addition, breach of a payment obligation is a material breach and should not be allowed to continue, so there are typical remedies available to parties who are wronged. Better than whining is writing about it, and arms-length negotiation of the contract up front. Signing a boilerplate contract with onerous clauses is unwise (and usually unnecessary, even with public Owners) unless the Contractor has priced the risk and cost of such clauses.
Posted by: Michael Duffy - Friday, February 03, 2017 9:59 AM


How does the General control the Lender? If the Bank pulls its funding out,after telling the Contractor in writing that the job was fully funded, is this the Generals problem? How could the General control what the bank does other than put pay if paid in their sub contract agreements? The bank loans the Developer $. Just like on any bank loan the Bank can stop funding pretty much at its discretion. If it changes its mind halfway thru a project be cause of economic forecasts or whatever it can do that and there is no recourse due any third party Contractors other than Lien rights.
Posted by: D A Davis - Friday, February 03, 2017 10:12 AM


I will walk away from this type of contract wordage as it has hurt me in the past. Example simple snow removal with this same wordage cost me $160,000. The owners and general got in a dispute because the owners store people didn't know how to loge in as us being there even though the contractor had daily call logs for us to service and our logging into their system as completed with discretion of service total inches and materials applied each time.

Long store short they got in a dispute and we didn't get paid. A great way to not pay your sub contractor and they didn't hurt at all because they had nothing involved but a contract on paper as we furnished all equipment labor, materials and insurance. I ask both parties to summit their records. Both did not reply. So I sued both parts and got paid from both parties but without any paper work about the dispute. Both parties were from Pa with the work do in WVa and MD. Great we got paid, but the lawyer took 33% and I had to wait a long time to get paid and still lost all profits and then some plus time fighting them. I couldn't lien the jobs. Now if a see a contract with pay when paid clause I ask to remove it or I'm out. And buy the way the contractor was featured in a Snow Removal Magazine as a Top Notch high tech and latest data systems in snow removal covering the east coast. They are now bankrupt and out of business,
Posted by: william manor - Friday, February 03, 2017 10:47 AM


Pay if paid contract clauses should be accompanied by stop work provisions allowing subs to stop work after providing reasonable notice if they aren't paid. This puts the onus back on the owner and mitigates risk to subs.
Posted by: Sandra Fraser - Friday, February 03, 2017 12:00 PM


There is no doubt that subs are the ones most impacted by pay-if-paid clauses. at worse, self performing GCs only perform a portion of the work, hence a portion of the risk. I agree with Sandra above that contracts containing pay-if-paid language should have ironclad stop work language if not paid, with a relatedly short notice provision, not a 30 day period
Posted by: Patrick Ouellet - Friday, February 03, 2017 1:49 PM


I have seen contracts with paid-when-paid stipulations as well as cannot stop work because of non-payment, which seems doubly unfair. I believe that since the prime is able to control and negotiate payments, as long as the subcontractor is working under the direction of the prime and is not able to negotiate schedule or price with the customer, then the prime ought to have the responsibility to pay the subcontractor. If the subcontractor is held to a paid when paid clause then they must also have the authority to negotiate schedule and payment terms with the customer for the piece of the work that they are doing. One example is when the prime has agreed to terms that you as the sub are not privy to, for example payment by deliverables, and your part is not one specific deliverable but a service that partially supports one or more deliverables. If the sub delivers its own agreed upon services and products, the prime should be liable for payment even if they have not completed their deliverable or are unable to deliver their product for reasons that have nothing to do with the sub. And if not paid within a reasonable amount of time without any attempt by the prime to recognize, negotiate or plan for payments, then the sub should be able to opt for stop work -- that becomes a business decision.
Posted by: Carmen Larsen - Friday, February 03, 2017 2:55 PM


These are not unusual claims.

They seem to be getting more frequent as well.

too bad Generals and Subs are unable to properly read the contracts and underwrite the quality of the project.

Surety bonds would be a simple answer and they are relatively inexpensive for the security they provide in getting to the bottom of the default and securing a solid answer including writing the check necessary to finish the job.
Posted by: Harry Crowell - Friday, February 03, 2017 5:41 PM


Gentlemen,

The short and long story - READ and understand your contract. Each and every section.


Posted by: Doug Luiz - Friday, February 03, 2017 6:33 PM


A lot of these comments seem to be using "pay-when-paid" and "pay-if-paid" interchangeably. These are two very different concepts. Pay-when-paid addresses cash flow and here in California the law says that subs must be paid within 10 days of receiving payment from the owner. By contrast, Pay-if-paid addresses the contractual risk of owner payments. Here in California these clauses have been found to be unenforceable. The question becomes when does "pay-when-paid" become "pay-if-paid".

Well then, how does a GC protect itself from being caught in the middle. Qualify your customer. File a preliminary lien notice with lender. If you a worried require the owner to provide a payment bond in your favor.

Remember, the only thing worse than no work is bad work. Better to pass on the project than walk into a buzz saw.
Posted by: Richard Faris - Friday, February 10, 2017 10:40 AM


 









WPL
PUBLISHING CO, INC.
WPL Publishing - 5750 Bou Avenue #1712 - Rockville, MD 20852

Phone: (301)765-9525  -  Fax: (301)983-4367

All Content and Design Copyright © 2021 WPL Publishing
About Us

Contact Us

Privacy Policy

My Account