The Subcontract Contingent Payment Clause: How Does It Affect the Construction Industry?

In simple words, a contingent payment clause in a subcontract means that the subcontractor takes on the risk of not getting paid by the owner. This is usually not good for the subcontractor because they may not be able to afford not getting paid. It can cause them a lot of problems, even if they have a legal right to get paid. Florida courts have said that whether a subcontractor is responsible for nonpayment from the owner is a legal issue. If the language in the contract is unclear, it can’t be enforced as a contingent payment obligation. Instead, it’s considered a time of payment clause, which means the subcontractor should be paid within a “reasonable time.” However, there’s no clear definition of what a reasonable time is. Some Florida courts have said it could be as soon as the court’s decision, while others have said 90 days after the work is done. If there is a contingent payment clause in the subcontract, the subcontractor can’t avoid it by claiming they were unjustly treated. This clause affects owners because they want the work completed on time and don’t want to pay for it twice. If a subcontractor doesn’t get paid, they may try to find reasons to stop or slow down the work, which can cause delays for the owner. If the subcontractor can keep working without getting paid right away, the owner benefits. If the subcontractor can’t work without getting paid, the owner or prime contractor could have a problem finishing the job and facing a legal claim. The subcontractor can still pursue payment directly from the owner by enforcing a claim of lien against the owner and its property, even if the general contractor has a contingent payment clause. The time to record a construction lien is based on when the work was performed, not on when payments are due. The owner should get a release of lien from everyone who could make a claim for payment, but the subcontractors and suppliers can give a conditional release for the current payment and then a final release once they receive the payment. Contractors and subcontractors can schedule monthly meetings to exchange payments and releases. They can also use a third party to hold onto payments until everyone gets their money. This extra step can cost more money and cause problems with getting funding or dealing with claims from subcontractors. The contractor can also act as the construction manager for the owner to avoid getting caught in payment disputes. This can help with cash flow, especially if the subcontractor is financially strong. Some subcontractors may struggle to pay their bills, so it’s important to work with reliable subcontractors. A contingent payment clause in a subcontract can be a problem if the subcontractor doesn’t have enough money to keep doing the work without getting paid. This can happen if the subcontractor didn’t understand the clause or hoped they wouldn’t have to deal with it. It’s a problem because it puts the subcontractor at risk of not getting paid for their work. The contractor and owner might try to avoid paying the subcontractor, who owes money to their own workers. In some states, if the contractor acts in bad faith and doesn’t actively seek payment, they could be in trouble. But it’s hard for the subcontractor to prove bad faith and they might not have the money to take legal action. If they leave the job, it could hurt their business. There isn’t really another way for the subcontractor to get paid, so they need to make sure they follow the rules for other ways to get their money. When a subcontractor can’t or won’t continue working without getting paid, the contractor and owner have to decide whether to find someone else to finish the job or try to work things out with the subcontractor. This can be complicated and might cost more money. If the contractor has a surety (someone who promises to pay if the contractor can’t), they might argue that they don’t have to pay the subcontractor if the contract says they don’t have to. Some courts have agreed with this, but it depends on the specific situation. Some courts have ruled that a subcontractor can’t use a “contingent payment” clause to avoid paying a surety on a construction bond. In Florida, there are special bonds that contractors can use with these clauses to protect themselves. One type of bond doesn’t allow the subcontractor to use the clause as a defense, while the other type does, as long as the owner has paid the contractor. This makes it harder for the surety to use the clause to avoid paying the subcontractor. In some cases, contractors and subcontractors don’t have the right to place a lien on a property if they’re not paid. Instead, they have to rely on a payment bond from the contractor’s surety. This means the contractor and its surety are responsible for paying subcontractors, even if the owner doesn’t pay them. Some people think this is fair because the contractor should be able to assess the risk before taking on a job. Others think it’s unfair because the contractor might not have the money to cover the owner’s nonpayment. Is there any appropriate legislation to protect subcontractors and smaller contractors from nonpayment by owners? It’s a complex issue because it’s hard to define who the “little guy” is and what protection they should receive. Some argue that it’s fair for subcontractors to bear the risk of nonpayment, but others believe they should have the right to pursue payment from the owner if they haven’t been paid. In Florida, there’s a law that allows subcontractors to take legal action against owners for unpaid work. In Florida, using a statutory payment bond can help protect subcontractors from not getting paid for their work. Some local governments also have laws that require subcontractors to be paid within a certain timeframe. There are also discussions about making laws to ban payment clauses that put subcontractors at risk. However, this is a controversial topic and not everyone agrees on the need for this kind of law. These are court cases about the conditions a contractor must meet in order to get paid for their work. Some cases say that the contractor must receive payment from the subcontractor before they can get paid, while others say that good faith efforts to receive payment are enough. In Florida, there are specific laws about this issue. One case found that if the contract between the contractor and subcontractor has conflicting payment terms, it is considered ambiguous and will be interpreted in favor of the subcontractor. These are court cases where construction companies were fighting over money. The courts had to decide if the payment terms in the contracts were clear enough. It’s important for subcontractors to make sure they get paid, but it can be hard to include extra costs in their price. In some cases, surety companies had to pay if the construction company didn’t. These are references to court cases and laws related to construction contracts and payment bonds in Florida. They involve disputes over payments for construction work and the legal requirements for payment bonds. One important law is Florida Statute §713.245, which outlines the rules for payment bonds on public construction projects. Another law is Florida Statute §713.23, which deals with payment bonds for private construction projects. These laws are important for ensuring that contractors and subcontractors get paid for their work. Larry R. Leiby is a well-respected lawyer who helped create and lead the Construction Law Committee of The Florida Bar. He is an expert in construction law and has written important books on the subject. He also works as a mediator and teacher at a law school.

Source: https://www.floridabar.org/the-florida-bar-journal/the-subcontract-contingent-payment-clause-how-does-it-affect-the-construction-industry/