1. Pay-if-paid and pay-when-paid provisions are heavily negotiated in construction contracts and can significantly impact payment obligations between contractors, subcontractors, and suppliers.
2. Pay-if-paid clauses can shift the payment obligation from the contractor to the subcontractor, making it contingent on the contractor receiving payment from the owner.
3. Pay-when-paid clauses may delay payment to the subcontractor until the contractor has been paid by the owner.
4. In the absence of a contract clause or state statute addressing payment obligations, payment for construction work is typically due upon substantial completion of the work. – A pay-if-paid clause requires payment from the owner before the contractor is obligated to pay a subcontractor.
– A pay-when-paid clause establishes a reasonable time for the contractor to make payment to the subcontractor after receiving payment from the owner.
– The majority view considers a pay-if-paid clause as a condition precedent to payment, while a pay-when-paid clause is seen as a timing provision.
– In the case of Peacock Construction Co. v. Modern Air Conditioning, the Supreme Court of Florida interpreted subcontract provisions requiring final payment within 30 days after completion of work and full payment by the owner. 1. Pay-when-paid provisions do not create a condition precedent to payment, but rather promise payment at a reasonable time.
2. A payment provision will only be considered a pay-if-paid clause if it is written in a clear and unambiguous manner.
3. The majority view holds that payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay subcontractors.
4. The intent is that small subcontractors should not assume the risk of the owner’s failure to pay the general contractor. 1. Judicial interpretation of ambiguous provisions for final payment in subcontracts should favor subcontractors for fairness.
2. The burden of clear expression for shifting the risk of payment failure to subcontractors lies on the general contractor.
3. A clear and unambiguous pay-if-paid provision must expressly state that payment by the owner is a condition precedent to the contractor’s duty to pay the subcontractor.
4. Contracts with pay-if-paid and pay-when-paid provisions should be reviewed for enforceability under applicable state laws.
5. Some states have legislation banning the use of pay-if-paid and pay-when-paid provisions in contracts. – Prompt Payment Acts are enacted in many states to ensure timely payment.
– Subcontractors can use pay-if-paid clauses to condition their obligation to pay lower-tier subcontractors and suppliers.
– There is inconsistency in the application of pay-if-paid and pay-when-paid clauses, with some states using them interchangeably.
– Court cases in different states have interpreted these clauses differently, with some viewing them as setting a condition precedent to payment and others interpreting them as fixing a reasonable time for payment.
Construction Contract Clauses: An Intro to Pay-if-Paid vs. Pay-when-Paid
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