“Pay-if-Paid” clauses in subcontracts are controversial. They shift the risk of project owner nonpayment from the prime contractor to the subcontractor. Subs contend this is unfair. They do business with the contractor. They have no agreement, and little leverage, with the project owner.
Some state supreme courts have ruled the clauses a violation of public policy, primarily because they compromise subcontractors’ mechanic’s lien and public works payment bond rights.
Some state legislatures have declared them void and unenforceable, yet a majority of the states still enforce the clauses.
The Kentucky Supreme Court recently addressed the matter for the first time. The clause in question was unambiguous. It said payment by the project owner to the contractor was a condition precedent to the contractor’s obligation to pay the sub. And, the subcontractor acknowledged it was relying on the credit of the owner, not the credit of the contractor.
The court ruled the clause was enforceable. The freedom of parties to contractually allocate risk outweighed any public policy concerns. Subcontractors were told, in effect, to take their complaints to the state legislature.
The other case in this issue involved the federal government’s withholding of superior information. The government was still allowed to assess liquidated damages for late completion against the contractor because the effect of the government’s breach was not material.