Builders and Contractors Exchange
Weekly Bulletin: 19 Jan 2004
What Is In That Subcontract You Just Signed? Payment Clauses
By: John Lockard
Subcontracts usually contain terms regarding payment that address such matters as retainage and the deadline for submitting invoices. Often, the clauses also address the time of payment and, in many cases, set the date for payment as a number of days after the owner has paid the general contractor. Subcontractors must be careful of these terms because they may not only set a date for payment, but also make the payment contingent of receipt of payment from the owner. These "pay when paid" clauses may shift the risk of the owner's non-payment from the general contractor to the subcontractor.
"Pay when paid" clauses are not prohibited under Virginia law. The clauses are strictly construed, however, against the general contractor. For example, a clause like the following probably will not be considered a strict "pay when paid" clause:
"Payment will be made within seven (7) days of the general contractor's receipt of payment from the owner."
A court would most likely interpret this clause as setting a date for payment, but not relieving the general contractor of the ultimate duty to pay the subcontractor if the owner goes bankrupt or otherwise will not, or cannot, pay the general contractor. In other words, the general contractor will not be able to use this clause as a defense to payment.
A clause like the following, however, probably does shift the risk of the owner's failure to pay to the subcontractor:
"Payments shall be made within fifteen (15) days after receipt by the general contractor of payment from the owner, but the subcontractor understands, acknowledges and agrees that payments to it shall not become due unless and until, and as a strict condition precedent, the general contractor has actually received payment from the owner for the subcontractor's work."
This language makes it clear that the subcontractor is not entitled to payment until the owner has paid the general contractor. The subcontractor may not be able to recover payment from the general contractor if the owner has not actually paid the general contractor. In this case, the general contractor has probably shifted part of the risk that the owner will not pay to the subcontractor.
Payment clauses also must be read in conjunction with other clauses addressing payment, including clauses that address progress payments and final payment. When in doubt, we recommend that a subcontractor have the proposed subcontract reviewed by an attorney experienced in construction matters.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.