what to do when the subs and suppliers ask you for payment
If you are a contractor, subcontractor, or supplier in the construction manufacture, you've probable heard the terms "pay-if-paid" and "pay-when-paid." Payment provisions are some of the most controversial and heavily negotiated provisions in construction contracts. This article defines the pay-if-paid and pay-when-paid provisions, explains their differences, and provides guidance on how to recognize them in practice.
Pay-if-paid and pay-when-paid clauses can alter the normal (i.e., common law) payment obligations running from the contractor to its subcontractor (or subcontractor to its supplier). Without a contract clause or country statute[i] addressing payment obligations, payment for structure piece of work is due on substantial completion of the work.
A "pay-if-paid" clause alters the common police force payment obligation by requiring payment from the owner as a condition precedent to the contractor's duty to pay a subcontractor or supplier.[ii] A condition precedent is "an act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises."[iii] In other words, a pay-if-paid clause means the contractor is only obligated to pay the subcontractor if it receives payment for the subcontractor's work from the owner. An case of a pay-if-paid clause is every bit follows:
Contractor'south receipt of payment from the possessor is a condition precedent to contractor'due south obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner'south nonpayment and the subcontract price includes the risk.[iv]
A "pay-when-paid" clause, on the other hand, is a payment condition that establishes a reasonable time for the contractor to comply with its duty to make payment to a subcontractor or supplier upon the contractor's receipt of payment from the owner.[five] "A pay-when-paid clause governs the timing of a contractor's payment obligation to the subcontractor, commonly by indicating that the subcontractor will exist paid within some fixed fourth dimension period after the contractor itself is paid by the belongings owner."[vi] An instance of a pay-when-paid is as follows:
The contractor shall pay the subcontractor within seven days of the contractor's receipt of payment from the owner.[seven]
Under the majority view[viii], a pay-if-paid clause is a condition precedent to payment and a pay-when-paid clause is simply a timing provision. Recognition of the difference betwixt these two types of payment clauses is, therefore, vitally of import because they can govern whether there is a duty for the contractor to make payment to a subcontractor if payment is never received from the owner.
In Peacock Construction Co. v. Modern Air conditioning[ix], the Supreme Court of Florida interpreted subcontract provisions stating
Final payment shall be made within 30 days afterwards the completion of the work included in this subcontract . . . and full payment therefor by the Owner . . .
equally a pay-when-paid provision that did not create a condition precedent to payment "just rather constitutes [an] absolute promise to pay, fixing payment by the owner as a reasonable time for when payment to the subcontractor is to exist made."[x]
Nether the majority view, a payment provision will but be constitute to exist a pay-if-paid clause when it is written in a clear and unambiguous manner, which removes any dubiety about the purpose of the clause. Pay-if-paid clauses are valid "where the language of the contract in question is articulate on its confront."[xi]
The rationale for the bulk view, as stated by the Supreme Court of Florida, is equally follows:
[The] intent in nearly cases is that payment by the owner to the full general contractor is non a condition precedent to the general contractor'south duty to pay the subcontractors. This is considering small subcontractors, who must take payment for their work in order to remain in business organisation, will not unremarkably assume the risk of the owner'due south failure to pay the general contractor.
…
Our decision to require judicial estimation of ambiguous provisions for final payment in subcontracts in favor of subcontractors should not be regarded every bit anti-general contractor. Information technology is simply a recognition that this is the fairest way to deal with the problem. There is nothing in this opinion, however, to foreclose parties to these contracts from shifting the risk of payment failure by the owner to the subcontractor. Merely in order to make such a shift the contract must unambiguously limited that intention. And the brunt of clear expression is on the general contractor.[xii]
Every bit stated by another court, "[a] clause which provides that the contractor shall pay a subcontractor within a stated number of days afterward the contractor has received payment from the possessor only fixes the time when the payment is due and does not found a condition precedent to payment."[13]
To achieve the goal of a articulate and unambiguous pay-if-paid provision, a pay-if-paid will normally (one) expressly land that payment by the possessor is a status precedent to the contractor's duty to pay subcontractor; (ii) include other conditions precedent, such as owner and architect'due south acceptance of subcontractors piece of work; and (3) expressly land that the subcontractor assumes the hazard of the owner's nonpayment. Without this diction, parties can discover themselves arguing about their intentions at the time they went to contract and run the substantial chance that a court will find the provision to be a pay-when-paid provision regardless of the parties intentions.
In instances where the parties intend to create a pay-when-paid obligation, the pay-when-paid provision should (ane) define what constitutes a reasonable period of time for when in that location is payment by the possessor and when in that location is not payment by the owner; and (ii) expressly land that payment past the owner is not a status precedent to the contractor's duty to pay subcontractor.
When reviewing contracts containing pay-if-paid and pay-when-paid provisions information technology is important to verify the enforceability of such provisions nether the applicable country's laws. Non surprisingly, these provisions are the topic of legislation throughout the U.s. with some states going and then far as to ban their use. Pertinent state laws and other defenses relating to the enforceability of these provisions will be the topic of a time to come commodity.
[i] Many states have enacted Prompt Payment Acts to ensure timely payment. See, due east.thousand., O.C.K.A. § xiii-11-1, et seq.
[ii] Subcontractors may also apply pay-if-paid clauses to condition their obligation to pay lower-tier subcontractors and suppliers.
[iii] BMD Contractors 5. Fidelity and Deposit Co. of Md., 679 F.3d 643 (7th Cir. 2012) (quoting Blackness's Law Dictionary 334 (9th ed. 2009)).
[iv] Id. at 648-49.
[v] Subcontractors may also use pay-when-paid clauses to status their obligation to pay lower-tier subcontractors and suppliers.
[vi] Id. at 648-49.
[seven] Id.
[8] Despite widespread recognition of the distinction between the terms pay-if-paid and pay-when-paid, the terms are not always applied consistently. In fact, there are some states where they are used interchangeably.
[ix] 353 And so. 2d 840, 842-43 (Fla. 1977).
[x] Id.; but see Peacock Construction Co. v. A.M. West, 111 Ga. App. 604, 142 Southward.E.2nd 332 (1964) where the Georgia Courtroom of Appeals interpreted the verbal same provision equally a ". . . clearly expressed condition precedent to defendants' liability for final payment of the contract price."
[eleven] Galloway Corp. v. Due south.B. Ballard Constr. Co., 250 Va. 493, 464 S.Eastward.2d 349, 354 (1995).
[xii] Peacock Construction Co. v. Modern Air conditioning, 353 Then. 2nd 840, 842-43 (Fla. 1977).
[xiii] American Drilling five. City of Springfield, 614 S.W.2d 266, 273 (Mo. App. 1981); Meco Systems v. Dancing Deport Ent., 42 S.W.3d 794, 806 (Mo. Ct. App. 2001) ("As written, American Drilling is authority for the proffer that if a "pay if paid" provision is clear and unambiguous, it volition be interpreted as setting a condition precedent to the general contractor's obligation to pay. Conversely, if such a provision is cryptic, it will be interpreted every bit fixing a reasonable time for the full general contractor to pay.")
For boosted information, contact Darren Rowles or Scott Cahalan
Source: https://sgrlaw.com/construction-contract-clauses-an-intro-to-pay-if-paid-vs-pay-when-paid/
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