Frequently, subcontractors in the commercial, residential, industrial and government contracting arenas are confronted with pay-if-paid clauses or pay-when-paid clauses in construction contracts. Understanding the distinctions between pay-if-paid and pay-when-paid clauses and how the two contract clauses are typically enforced can mean the difference between getting paid within a reasonable time or forfeiting your rights to payment entirely.
In general, an owner’s failure to pay a general contractor does not relieve the general contractor from paying its subcontractor. However, a general contractor can shift the risk of non-payment by the owner to its subcontractor. This type of clause is often referred to as a pay-if-paid clause. A pay-if-paid clause must be clear, express and free from ambiguity to relieve the general contractor of its obligation to pay its subcontractors for their work.
If the contract language the general contractor relies on to deny payment to its subcontractor is not express or is ambiguous, the clause may be treated as a pay-when-paid clause. A pay-when-paid clause does not relieve the general contractor of its obligation to pay its subcontractors. Rather, a pay-when-paid clause will most likely require the general contractor to pay its subcontractor within a reasonable amount of time regardless of whether the general contractor ever receives payment from the owner.
A well-drafted subcontract, including payment provisions, can mean the difference between getting paid and litigation on a construction project.
Milo D. Miller Law Group, P.C. has significant experience drafting, arbitrating and litigating construction matter involving pay-if-paid clauses. For more information, contact Milo Miller of Milo D. Miller Law Group, P.C., at 720-306-7733 or [email protected]