Subcontractors are struggling with the “pay-when-paid” provision in their contracts with general contractors. This clause essentially means that subcontractors don’t get paid until the general contractor gets paid, which can be a big problem. The Florida Supreme Court backed this provision in a case called Peacock Construction Co. v. Modern Air Conditioning, Inc. They basically said that this is a common practice in the construction industry and that subcontractors should know the risks. This is a big issue for small subcontractors who need to get paid in order to stay in business. The court made two mistakes in its assumptions about a risk-shifting provision in a contract. First, the provision was meant to protect the general contractor from not getting paid by the owner before having to pay the subcontractor. Second, the court was wrong to think that small contractors don’t usually take on the risk of not getting paid by the owner. In some cases, they have to accept this risk in order to compete for work. There have been different decisions in other cases about whether similar provisions actually shift the risk or not. In 1990, the Supreme Court made two important decisions about when subcontractors get paid by general contractors. One decision said that a “pay-when-paid” clause in a contract could make it so the subcontractor only gets paid if the general contractor gets paid. But another decision said that if there was a problem with the contract that made it unclear, the subcontractor could still get paid. This led to a new law to protect sureties and general contractors. Different courts in Florida had different opinions about how to handle these payment issues, and they made different rulings in a couple of cases. “Subcontractors often get stuck with ‘pay-when-paid’ clauses that make it hard for them to get paid on time. Here are some ideas to fix the problem:
1) Make a law to ban ‘pay-when-paid’ unless both parties had a fair say in the contract.
2) Try to work on more public projects, where the rules are different.
3) Ask groups that help subcontractors to speak up in court cases.
4) Try not to take jobs with ‘pay-when-paid’ clauses, and maybe they’ll start to disappear.” Construction contracts should be fair to subcontractors and not put them at risk of nonpayment from an unknown owner. It’s unfair for subcontractors to bear the burden of nonpayment and it can lead to rushed work and poor quality. Lawyers should advise their clients to avoid shifting risk onto others.
Source: Florida Bar, Real Property, Probate and Trust Law Section
Source: https://www.floridabar.org/the-florida-bar-journal/pay-when-paid-construction-contract-requirement-bane-of-the-subcontractors-existence/
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