Subcontract payment clauses which pass the risk of owner nonpayment through to the subcontractor have long been controversial. The subcontractor contracts with the prime contractor, not the project owner. The sub has little opportunity to assess the creditworthiness of the owner. But if the owner doesn’t pay and a pay-if-paid clause in the subcontract is enforced, the sub has no contractual entitlement to payment. This in turn defeats any mechanic’s lien or payment bond rights the sub might otherwise have had.
In some states pay-if-paid clauses have been rendered void and unenforceable, either by statute or case law. Generally, however, it comes down to the freedom to contract. This was illustrated in a recent Texas case. The court acknowledged the harsh effect of the clause and said it was reluctant to enforce it against the subcontractor. But the clause was so tightly and clearly drafted, the court felt it had no choice. The subcontractor had not only agreed to assume the risk of owner nonpayment but recited that it had priced its bid to compensate for that risk.
Is this really fair? Does a trade contractor, scrambling for work, have the leverage to freely negotiate the assumption of the risk of owner nonpayment? In a competitive bidding market, is it realistic to say that the sub’s bid price includes compensation for the assumption of that risk? As always, I welcome your comments.
In next week's issue of Construction Claims Advisor:
- Sub Failed to Protect Itself against Proprietary Specification
- Ohio Supreme Court Addresses Recovery of Bid Preparation Costs
- Claim Was Invalid due to “Approximate” Mark-Ups