“Pay-if-paid” clauses are enforceable in most jurisdictions. These subcontract clauses make the project owner’s payment to the prime contractor a “condition precedent” to the prime’s obligation to pay the subcontractor for its work. When properly drafted, the clauses effectively shift the risk of owner nonpayment from the prime to the sub.
Courts interpret pay-if-paid clauses narrowly in order to limit the harmful economic impact on subcontractors. This was illustrated in a recent Maryland case. The clause referred to payments of the “subcontract sum.” This was interpreted as the subcontract price, adjusted by any contract modifications. The clause did not apply to increased performance costs allegedly caused by prime contractor mismanagement. The clause did not operate as a waiver of subcontractor delay damages.
The other case in this issue involved a surety’s liability on its performance bonds. A project owner’s nonpayment justified a bonded contractor’s work stoppage and discharged the surety of its bond obligations.
