A pay-when-paid (or pay-if-paid) contractual provision exists in almost every construction contract you are asked to sign these days. A pay-when-paid provision is a contract clause that shifts the risk of nonpayment from one party to another. As an example, with such a provision in place in a subcontract agreement, if the owner doesn’t pay the contractor, the contractor doesn’t have to pay the subcontractor. This is a legal defense to payment. It’s valid and enforceable in Florida and it’s important to understand that a pay-when-paid provision can mean you may not be paid.
In Florida, pay-when-paid provisions are enforceable if they include certain language. Generally, it’s the inclusion of certain words such as, “condition precedent” or “contingent upon”. If those phrases are within the pay-when-paid provision, more often than not, the pay-when-paid provision will be found to be valid and enforceable.
How do you deal with these risk shifting clauses? Consider these three factors:
1. Strike the provision. Unfortunately, in this economic climate, it can be very difficult to do so. However, you may be able to strike some of the language which could render the provision unenforceable.
2. Take a look at the prime contract. Most prime contracts are incorporated into your subcontract or sub-subcontract. If so, the prime contract may contain provisions that will void an otherwise valid and enforceable pay-when-paid provision.
3. See if the job has a bond. If the contractor posted a performance and payment bond on your job, even if there is a valid and enforceable pay-when-paid provision in your contract, you may be able to make a claim against the contractor’s payment bond.
Be aware that even if you have a pay-when-paid provision in your contract, your lien rights may have survived and still be intact. And while you may not be able to overcome a pay-when-paid provision in your contract, it’s important to at least understand the associated risks.