Builders and Contractors Exchange
Weekly Bulletin: 31 aug 2007
What Does A “Pay-If-Paid” Clause Really Mean?
By: Sheryn E. Joy
A “pay-if-paid” clause is a provision which shifts the credit risk from the general contractor’s shoulders to the subcontractor’s shoulders. If the owner does not pay the general contractor for any reason, a “pay-if-paid” clause prevents the subcontractor from recovering at all from the contractor. Thus, the contractor will not be required to pay his subcontractor for the work performed, even through no fault of the subcontractor, until the owner first pays the contractor for the subcontractor’s work.
Virginia courts strictly interpret “pay-if-paid” clauses and place a heavy burden on contractors to prove the existence of an express and clear “pay-if-paid” provision. To establish a “pay-if-paid” provision under Virginia law, the provision may read "payment by the owner is a condition precedent of payment to the subcontractor.” This establishes an express condition precedent to payment. In addition, the condition precedent establishes the subcontractor’s right to be paid under the contract and not just when the subcontractor will be paid.
A “pay-when-paid” clause, on the other hand, postpones the time of payment to the subcontractor after the work is complete during which the contractor is afforded an opportunity to obtain the funds from the owner. A “pay-when-paid” clause does not shift the risk of non-payment to the subcontractor and does not function to prevent payment to the subcontractor indefinitely. For example, a “pay-when-paid” provision may read, “final payment to Subcontractor will occur within 30 days of payment to Contractor by Owner” or “the Contractor shall pay the Subcontractor each progress payment within 3 working days after the Contractor receives payment from the owner.” The primary difference is the absence of the condition precedent language that is found in “pay-if-paid” provisions.
Both contractors and subcontractors should be aware of the differences between “pay-if-paid” and “pay-when-paid” clauses. The impact these provisions have on project participants varies. Subcontractors should be aware of the harsh consequences a “pay-if-paid” provision brings and general contractors should be certain that their intentions are sufficiently met in a correctly drafted contract. The choice of a few words may make all the difference in court.
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.