Is it fair for subcontractors to bear the risk of owner nonpayment for their work? Many prime contractors would argue that it is. The subcontractor is being asked to share the risk. If the project owner hasn’t paid the prime for the sub’s work, why should the prime be required to pay the sub, in effect financing the owner’s project?
Subcontractors would respond that the prime contractor elected to do business with the project owner and had the opportunity to evaluate the credit-worthiness of the owner. The sub contracted only with the prime and should be paid by the prime for work performed. The subcontractor has no control over the business relationship between the project owner and the prime contractor.
Some states have limited, by statute or case law, the enforceability of subcontract pay-if-paid clauses. But in the majority of jurisdictions, the clauses are enforceable if clearly and unambiguously worded. A recent federal appellate decision, applying Virginia law, illustrated how difficult it can be to avoid the effect of these clauses.
I invite your opinion on this topic. Is it reasonable for prime contractors to expect their subcontractors to share the risk of project owner nonpayment?
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