Contingent Payment Clauses in Construction Contracts
With every construction contract comes the risk of the owner failing to compensate for the work performed. Typically, the general contractor is the individual who bears this risk. However, sometimes general contractors will try to shift the risk of non-payment by an owner to their subcontractor(s). In fact, it is quite common to find a contingent payment clause within a contract between a general contractor and subcontractor. This removal of liability can be seen written in a contract in the form of either a Pay-If-Paid Clause or a Pay-When-Paid Clause. Although the two seem to be one in the same, their legal effects are profoundly different and it is always best to consult a Tampa construction lawyer prior to signing a construction contract, or if you are need of having a contract written.
A Pay-If-Paid clause is a provision within a contract that generally states that payment from general contractor to sub-contractor is contingent on payment from owner to general contractor. This means that even if the sub-contractor has fulfilled all of their contractual obligations, the general contractor has no obligation to pay the sub-contractor for those services if they themselves have not yet received payment from the owner. A Pay-If-Paid clause transfers the risk of owner non-payment to the sub-contractor, which affects the sub-contractors entitlement to payment. For this type of clause to be binding, courts require a clear understanding of the contract language used in this provision and makes clear that the provision is an intended result of all parties involved.
To ensure that your contracts are legally binding, it is highly recommended to seek the guidance of a professional and experienced construction lawyer in Tampa to draft and review your contracts.
A Pay-When-Paid clause is a provision of a contract that generally states that payment from general contractor to sub-contractor will occur when the general contractor receives payment from the owner. This clause is not interpreted by the courts in the same manner as Pay-If-Paid clauses. a Pay-When-Paid clause does not shift the entire risk of owner non-payment to sub-contractors and requires payment from general contractor to sub-contractors within a reasonable time frame. As a result, this clause only affects the timing of payment and leaves the general contractor holding the risk of owner non-payment.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.