Waiting to Get Paid: Are Pay When Paid Provisions a Matter of When or If?

In construction contracts, subcontractors may have to wait to get paid if the owner doesn’t pay the general contractor. This is called a “pay-when-paid” clause. It can be tricky because it might mean the subcontractor only gets paid after the owner pays the general contractor, or it might just set a reasonable timeframe for payment. It’s important for subcontractors to understand this clause before they agree to it. In most cases, when a service provider doesn’t get paid, it’s because the general contractor hasn’t been paid by the owner. In these situations, the courts usually don’t consider what the parties intended when they agreed to payment terms. Instead, they just look at the written contract and decide as a matter of law. This is because the courts believe that the payment terms are predictable in construction projects, and the parties’ intentions are usually the same from project to project. In most cases, general contractors are still required to pay subcontractors even if the owner hasn’t paid them yet. This rule applies to construction projects of all sizes. However, if a contract clearly says that the general contractor doesn’t have to pay the subcontractors until they get paid by the owner, then that rule doesn’t apply. The general contractor has to make sure the contract is very clear about this. If it’s not clear, the courts will usually say that the general contractor has to pay the subcontractors. If a subcontract includes the general contract and general conditions between the owner and prime contractor, and there are inconsistencies between the two contracts, it can create a problem. In a court case, it was found that the general contractor couldn’t avoid paying its subcontractors just because the owner hadn’t paid them, even though their contract said otherwise. This is a good example of why it’s important to make sure all contracts are clear and consistent. Risk shifting in construction contracts is about who takes on the risk if the owner doesn’t pay. The language in the contract needs to be clear and consistent. If a clause says the contractor doesn’t have to pay the subcontractor until the owner pays, that shifts the risk to the subcontractor. But if the clause says the contractor has to pay the subcontractor within a certain time after the owner pays, that shifts the risk to the contractor. Sureties, who provide payment bonds, also need to be careful with their wording to avoid being responsible for paying subcontractors if the owner hasn’t paid the contractor. If a subcontractor doesn’t have specific language in their contract about conditional payment, the surety (the company that guarantees the contractor’s work) still has to pay up if the contractor doesn’t. This means the surety is responsible for the same things as the contractor. It’s important to carefully review contracts before starting a project, as there may be clauses that impact payment. Rushing through bidding and not understanding the contract can lead to costly mistakes later on. It’s important to pay attention to the fine print and seek legal advice if needed to avoid potential issues. We have two authors who are lawyers at a law firm in Miami.

Source: https://www.floridabar.org/the-florida-bar-journal/waiting-to-get-paid-are-pay-when-paid-provisions-a-matter-of-when-or-if/