Pay-When-Paid Contingent Payment Clauses
Contingent payment clauses can be found in almost all Florida subcontracts. These clauses require an owner to make payment to a contractor before the contractor has any obligation to pay the subcontractor. These clauses continue to expand in scope, often including the surety (where there is one), and may also provide that the subcontractor has no cause of action of any kind against the contractor or surety if the contractor is not paid.
Several states have banned these types of provisions on the grounds that they contradict public policy or that they impair a subcontractor’s ability to exercise its rights under state lien law.
Contractors include contingent payment provisions for understandable reasons. Contractors generally operate on thin margins, and it could prove financially disastrous for a contractor to “finance the job” and pay all of its subcontractors and suppliers in advance of payment from the owner. Yet this rationale ignores the effect of non-payment on each subsequent step in the chain of contracts, as it is no less disastrous for a subcontractor to have to pay all of its sub-subcontractors, suppliers, and personnel out-of-pocket.
As a brief background, any entity or laborer who improves real property under a contract or subcontract has a right to claim a lien against the improved property in the case of non-payment. Florida law prevents a lienor from waiving its right to claim a lien in advance of performing the work.[4] A payment and performance bond (“bond”), issued by a surety on behalf of the contractor, guarantees payment to subcontractors and suppliers, and guarantees that the contractor will complete the project. It serves as substitute security for lienors, protects an owner’s property from claims of lien, and the right to claim against it may also not be waived in advance.
The issue to be reviewed below is twofold:
- Does Florida’s lien law provide a basis for outlawing pay-if-paid clauses?
- Does Florida’s lien law provide a basis for finding pay-if-paid clauses unenforceable to the extent that they impair lien or bond rights?
Does Florida’s lien law provide a basis for outlawing pay-if-paid clauses?
No, neither Florida’s Lien Law nor any other provision of the Florida statutes provides a basis for outlawing pay-if-paid clauses in their entirety.
Those states that have prohibited pay-if-paid clauses in their entirety have generally done so by a statute that specifically addresses this issue. North Carolina’s N. C. Gen. Stat. § 22C-2 states that:
Performance by a subcontractor in accordance with the clauses of its contract shall entitle it to payment from the party with whom it contracts.
Payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, and an agreement to the contrary is unenforceable.
Similarly, Wisconsin’s Wis. Stat. § 779.135(3) explicitly prohibits clauses in contracts for the improvement of land which make “payment to a prime . . . a condition precedent to a prime contractor’s payment to a subcontractor, supplier, or service provider.
Florida’s statutes contain no such admonition and, until they do, pay-if-paid clauses will continue to haunt subcontracts.
Does Florida’s lien law provide a basis for pay-if-paid clauses unenforceable to the extent that they impair lien or bond rights?
On the other hand, Florida law does provide a basis for finding that clauses impairing lien or bond rights are unenforceable.
Florida law precludes a lienor from waiving either lien or bond rights in advance of performing any work. § 713.20(2), Fla. Stat. (2019) states as follows:
A right to claim a lien may not be waived in advance. A lien right may be waived only to the extent of labor, services, or materials furnished. Any waiver of a right to claim a lien that is made in advance is unenforceable.
Regarding bonds, § 713.24(1)(f), Fla. Stat. (2019) states that a “lienor may not waive in advance his or her right to bring an action under the bond against the surety.”
Notwithstanding the law, numerous subcontracts contain language similar to the following:
Receipt of these funds by Contractor shall be an absolute condition precedent to Subcontractor’s right to receive payment […] Subcontractor: (i) agrees that the Price shall be a non-recourse obligation; and (ii) waives Subcontractor’s right to assert any claim, demand, right, or cause of action against Contractor for any portion of the Price.
Other subcontracts contain language, or similar language, to the below clause, which explicitly precludes bond claims:
… receipt of payment by the Contractor from the Owner for the Subcontractor’s Work is a strict condition precedent to Contractor’s obligations to make payment to the Subcontractor under this Agreement, as well as any bond issued on behalf of Contractor and, therefore, no funds will be owed to Subcontractor by Contractor, or Contractor’s surety, unless and until Contractor is paid by the Owner for Subcontractor’s Work. Receipt of payment from the Owner shall also be deemed an express condition precedent to any claim for payment by Subcontractor against any surety bond procured by Contractor and against the surety issuing same.
One of the most egregious examples of an unenforceable payment clause is the following:
Subcontractor […] hereby covenants and agrees not to file any lien or make any claim against the Project […], or file any lien, make any claim […] against any monies due or to become due to Contractor, in accordance with any statute, state or federal, for any cause whatsoever.
Under Florida law, all three of these clauses are at least partially unenforceable. The clause, “the price shall be a non-recourse obligation” is particularly severe, as it requires the subcontractor to agree that it has no recourse of any kind regarding payment. Such language arguably creates an unenforceable illusory contract. See, Pan-Am Tobacco Corp. v. Dep’t of Corr., 471 So. 2d 4, 5 (Fla. 1984) (“It is basic hornbook law that a contract which is not mutually enforceable is an illusory contract.”). More to the point, such a clause requires the subcontractor to give up its lien rights in advance and is therefore unenforceable.
The second example, which makes payment from an owner an express condition precedent to bond claims, is equally unenforceable because it requires a subcontractor to give up its claims against the surety, a clear violation of § 713.24 (1)(f), Fla. Stat. (2019).
The third example is a flagrant violation of Florida law in that it blatantly requires a lienor to abandon all recourse, whether or not guaranteed by state or federal law and whether or not the prime contract provides for recourse.
Contractors have also attempted to circumvent the language of the statute granting the right to a lien by claiming that “no funds will be owed to Subcontractor by Contractor” unless the owner has made payment. Unless price is designated as a non-recourse obligation, which would render the contract as a whole unenforceable, such a statement ignores the distinction between the accrual of a debt (“owe”) and the obligation to make a payment (“due” or “payable”). Performance by the subcontractor creates a debt that is payable according to the terms of the subcontract and if the obligation to pay the debt does not exist but for a condition over which the performing party has no control, we again have an arguably illusory and unenforceable contract.
Can the unenforceable clauses be excised from the contract?
Contracts often contain a “severability” or “savings” clause that allows a court to sever unenforceable provisions from a contract while preserving the validity of the remainder of the contract. However, not all contracts are severable. In Local No. 234 of United Ass’n of Journeymen & Apprentices of Plumbing & Pipefitting Indus. of U.S. & Canada v. Henley & Beckwith, Inc., the Florida Supreme Ccourt held that the unenforceable portion of a contract is only severable if it does not go to the essence of a contract and if, with the unenforceable provision removed, “there still remains of the contract valid legal promises on one side which are wholly supported by valid legal promises on the other.”
Applying this principle to pay-if-paid clauses, it would appear to be a simple matter to remove the unenforceable provisions and thus permit lien and bond claims to go forward. However, some subcontracts are so focused on strengthening the pay-if-paid clause that they include language making the clause a material term of the contract.
It is not unusual to find clauses that require the subcontractor to acknowledge that acceptance of these contingent payment terms is a material inducement to executing the subcontract.” One example reads as follows:
It is specifically agreed by Subcontractor that a material matter of inducement and consideration for the award of this Subcontract by [Contractor], is the Subcontractor’s agreement that it will not look to [Contractor], or its surety, for payments hereunder unless and until [Contractor]has received payment for Subcontractor’s work from the Owner.
Florida courts have held that “material” and “essence” are, in effect, synonymous, observing that “[w]here…lender’s notice letter varies from [the contract] in a way that goes to the essence of the parties’ bargain, the variation is material and the lender has failed to satisfy a condition precedent to the foreclosure action.” Accordingly, one can make a colorable argument that to strike an unenforceable term that is a material inducement in a pay-if-paid clause is to strike at the essence of the contract and render it void in its entirety.
Does the inability to waive bond claims rights operate to negate pay-if-paid altogether?
The inability to waive bond claims has the practical effect of negating pay-if-paid clauses on projects where there is a bond.
However, that does not mean that the pay-if-paid clause is inherently unenforceable. It is unenforceable as to the surety who, upon having made payment to a subcontractor, will seek recovery from the contractor, de facto negating the payment clause. The situation would unfold as follows: a subcontractor demands payment from a contractor, who will claim non-payment by the owner as a defense. The subcontractor then timely files a Notice of Non-Payment pursuant to Section 713.23 (1)(d), Fla. Stat., putting the surety on notice that it has not been paid. Although the surety will likely attempt to assert the defense of non-payment by the owner, it will eventually be required to pay the subcontractor. Because the cost of a surety’s payments or performance is the responsibility of its principal, the contractor, the surety will look to the principal to recover what it has paid out to the subcontractor.
What is the effect of incorporating the direct contract?
Almost all subcontracts incorporate the direct contract by reference. The effect of this incorporation is to make the terms of the owner-contractor contract apply to the subcontract as well. Such incorporation can have unintended consequences for the pay-if-paid terms of the subcontract.
Where a direct contract required a contractor to make payment to its subcontractors in advance of final payment from the owner, and the subcontract contained a pay-if-paid clause, the Florida Supreme Court held that an ambiguity existed, and that “such ambiguity must be resolved against the general contractor.”Moreover, the ambiguity prevented the pay-if-paid “provision from effectively shifting the risk of the owner’s nonpayment from [contractor] to [subcontractor]. [Contractor] thus remains liable for the final payment owed [subcontractor].” . The Fifth district court has also held that “[b]y incorporating the prime contract into the subcontract, the pay-when-paid clause becomes ambiguous,” thus converting a pay-if-paid clause to a pay-when-paid clause, the latter being widely as requiring payment to a subcontractor within a reasonable time.
Contractors attempt to circumvent this by inserting language into the subcontract that raises the statute of the pay-if-paid clause above anything else in the contract documents. One example is the following:
Notwithstanding anything to the contrary contained within any of the Contract Documents, including, but not limited to, Contractor’s agreement with the Owner, receipt of payment by the Contractor from the Owner for the Subcontractor’s Work is a strict condition precedent to [payment to subcontractor].
Such efforts may be of no value in shifting the risk of payment to the subcontractor. If this clause contradicts the terms of the direct contract, an ambiguity still exists, and such ambiguity will be resolved in favor of the subcontractor to create a pay-when-paid clause.
Conclusion
Subcontractors have historically had difficulty receiving payment, and contingent payment clauses have exacerbated such problems. However, it was once much worse. More than a century ago, the Kansas City Court of Appeals was confronted with a case where a subcontractor had entered into a contract that provided for payment outside the time limits for imposing a lien claim on an owner’s property. Therein the court noted that:
[t]he necessary consequences [of a contract that provided for final payment after the time to record a lien had run] would seem to be that, if a party places himself in a position which renders him unable to bring suit to enforce the lien within the time limited, he thereby virtually waives it, having deprived himself by his own voluntary act of the right to enforce it.
Fortunately, the law has substantially evolved since that time. Although contingent payment clauses are enforceable in Florida, they only provide temporary protection to the general contractor, and none to the owner or to the contractor’s surety. Notwithstanding contrary language in a subcontract, an unpaid subcontractor retains the right to record a claim of lien and the right to claim against a payment bond.
Never a Sure Thing: Pay-When-Paid Provisions in Construction Contracts
Given the vagaries and uncertainties these days in loan commitments as well as material prices, not to mention the overall state of the construction industry, one can quickly understand why pay-when-paid provisions have become so critical in construction contract negotiations.
A pay-when-paid provision in a construction contract generally means that a contractor is not liable for payment to its subcontractors until such time as it is first paid by the owner. In the context of litigation, a defense based on a contractual pay-when-paid provision might assert that a plaintiff subcontractor is not entitled to receive payment unless the owner first pays the contractor for subcontractor’s fees, or, alternately, that under the relevant contractor-subcontractor agreement a plaintiff subcontractor is not entitled to receive further payment pursuant to its claims until the contractor is paid by the owner for the fees claimed.
In Florida the general rule is that interpretation of contract provisions relating to conditions and time of payment between a contractor and subcontractors (also called risk-shifting provisions) is a question of law that a judge (as opposed to a jury) may decide on his or her own. The Florida Supreme Court has held that risk-shifting provisions are susceptible to only two possible interpretations: (1) if a provision is clear and unambiguous, it is interpreted as setting a condition precedent to the general contractor’s obligation to pay; but (2) if a provision is ambiguous, it is interpreted as fixing a reasonable time for the general contractor to pay (whether or not it has been paid by the owner).
If a contract does not clearly express an intention to shift the risk of nonpayment, payment provisions will be interpreted as establishing a reasonable time to pay by the contractor (as opposed to creating a condition precedent to the contractor’s obligation to pay the subcontractor). When preparing a contract the burden of clearly expressing an intention to shift risk is on the contractor. This is important because courts will not assume the existence of a pay-when-paid provision in a contractor-subcontractor contract unless it is specifically and clearly expressed in writing by the contractor. The reasoning is that small subcontractors, who need to receive payment for their work in order to remain in business, typically will not assume the risk of the owner’s failure to pay the general contractor.
How does a Surety Bond Factor Into Pay-When-Paid Provisions?
All of the above rules relating to risk-shifting provisions presuppose the existence of a written contract. If the contract in dispute is verbal it is not possible to successfully argue a pay-when-paid defense. Stated differently, in order for a contractor to validly assert a contractual provision which shifts the risk of payment such a provision must be in writing.
Additionally, a pay-when-paid defense is not available to a surety on a contractor-subcontractor contract for which it has posted a bond. The reason that a surety may not assert a pay-when-paid defense is because the surety bond is a separate, distinguishable contract from the contractor-subcontractor contract and, as such, an inability to proceed against the contractor should not prevent recovery on the bond. Public policy concerns also militate against allowing a surety to assert a pay-when-paid defense, because to do so would undermine the statutory scheme under which a subcontractor can seek recovery under a bond as an alternative to employing the procedural mechanism of applicable lien laws.
To be clear, liability for payment to subcontractors, when a contractor has not been paid by an owner, will hinge on a clearly expressed pay-when-paid provision in a written contract. If a contract contains an ambiguous pay-when-paid provision, Florida law will require a contractor to pay its subcontractors within a reasonable time, irrespective of payment by the owner.
Is Payment Due Now, Later or Not At All?
It is customary for general contractors to include pay when paid clauses in their contracts, attempting to limit any requirement on their part to pay their subcontractors until they’ve received payment from the project’s owner. As a result, there have been a number of suits filed by subcontractors against general contractors for payments due on completed work. Can general contractors refuse to pay their subs because they have not yet received payment from their owners?
A recent case has followed a Supreme Court of Florida decision rendered in 1997 and acknowledged the right of parties to shift the risk of payment failure by an owner to a subcontractor. But the Court also recognized the majority rule in this country that payment by the owner to the general contractor is not a de facto condition precedent to the general contractor’s duty to pay its subs.
If a “pay when paid” provision is clear, the general contractor can make payment to his subs contingent on receipt of payment from the owner. However, if the language is susceptible to different meanings then, it must be interpreted as setting a reasonable time for the general contractor to pay. The burden for clear expression is on the general contractor.
In one case, decided against the general contractor, the Court found a provision stating “payment to the subcontractor would be made within 7 business days after receipt of payment from the owner” was unclear and ambiguous. Therefore, it did not shift the risk of payment to the subcontractor, but rather required that the general contractor pay his subs within a reasonable time.
Are Pay-When-Paid Provisions A Matter of When or If?
Shifting the risk of an owner’s possible non-payment from one party to another is neither simple nor guaranteed. Unsuspecting parties can quickly find themselves locked into an agreement containing a payment provision susceptible to conflicting interpretations. What the parties intended, and thought they understood, may in fact not be what they obtain.
A case in point, a subcontractor found itself in the unexpected position of waiting to get paid until the party with whom it contracted was paid by the owner. The center of the dispute involved the interpretation of the following payment provision contained in the written subcontract between the parties.
Article XIII Method of Payment
a) Subcontractor is relying upon the financial responsibility of Owner in performing the Work. It is understood by Subcontractor that payment for the work is to be made from funds received from Owner by Contractor in respect to the Work.
The subcontractor argued that the foregoing term simply fixed a reasonable time for payment by the contractor.[ii] Florida’s Third District Court of Appeals rejected that argument, holding instead that the subject provision plainly and unambiguously made payment by the owner a condition precedent to payment by the general contractor to the subcontractor.
Such payment provisions in construction contracts are commonly referred to as pay-when-paid clauses. While seemingly straight forward at first glance, many are actually ambiguous. The pay-when-paid language can be interpreted on the one hand as establishing a condition precedent where payment must first be received from the owner before it can be paid out to the service provider, or, on the other hand, as simply fixing a reasonable time frame for when payment is to be made.[iv] When interpreted as a condition precedent, the provider will get paid only on the condition that the party with whom it contracted has been paid by the owner. However, when seen as fixing a reasonable time frame for payment, the pay-when-paid language is treated as an absolute, unconditional promise by the general contractor to pay the subcontractor, with the understanding that the payment may be delayed for some reasonable time while the general contractor obtains payment from the owner.
More often than not, a service provider who thought he had secured a definite promise of payment realizes too late that, in fact, no payment will be forthcoming unless the general contractor receives payment from the owner.
Can the intent of either party alter the individual outcome of these cases?
The question is, can the intent of either party alter the individual outcome of these cases? Contrary to what one might expect, when it comes to construing these pay-when-paid provisions, most jurisdictions, including Florida, have precluded the trier of fact from determining what the parties actually intended on a case by case basis.
Ordinarily, the interpretation of a written contract is a matter of law to be determined by the court.[vi] In cases where the terms of a contract are ambiguous, however, the intention of the parties plays a pivotal role in determining which interpretation applies. In such situations, the actual intention of the parties is submitted to the jury as a question of fact. Although this principle of law is applied in most situations, disputes between contractors and subcontractors in reference to ambiguous pay-when-paid provisions are treated as the exception.[viii] That is, the question about what the parties actually intended in such cases is determined a matter of law.[ix] The explanation provided by the Court for its departure from the general rule is based on the supposed predictability and nature of the transaction.
If an issue of contract interpretation concerns the intention of the parties, that intention may be determined from the written contract, as a matter of law, when the nature of the transaction lends itself to judicial interpretation. A number of courts, with whom we agree, have recognized that contracts between small subcontractors and general contractors on large construction projects are such transactions. The reason is that the relationship between the parties is a common one and usually their intent will not differ from transaction to transaction, although it may be differently expressed.
That intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor’s duty to pay the subcontractors. This is because small subcontractors, who must have payment for their work in order to remain in business, will not ordinarily assume the risk of the owner’s failure to pay the general contractor.
Such reasoning was drawn from a case where the written contract required the general contractor to make payment to its subcontractors within thirty (30) days after completion of the work included in this subcontract, written acceptance by the Architect and full payment therefore by the Owner.
Based upon a finding of ambiguity in this payment provision, the Florida Supreme Court held, as a matter of law, that payment by the owner was not a condition precedent to the subcontractor’s right to receive payment. This case, Peacock Construction Co. v. Modern Air Conditioning, Inc., while still good law, does raise some interesting issues. Because the Court was apparently focusing on contracts between small subcontractors and general contractors on large construction projects, then is one to assume that the Peacock precedent need not apply to disputes arising from small construction projects? And what exactly is the definition of a A large construction project? If applied as a bright line rule to all transactions between contractors and subcontractors, however small they or the construction job might be, then isn’t the Peacock rule unfairly favoring one party over the other? Unfortunately, the reported cases over some twenty years that have followed Peacock have yet to address these issues.
The Court in Peacock did recognize that nothing prevents parties from shifting the risk of an owner’s nonpayment provided the contract expressly and unambiguously states such intent. The burden of clear expression is on the party seeking to pay only when paid,[xiv] and any ambiguity will be construed against it as a matter of law.
What complications should I look out for when dealing with a Pay-when-paid issue?
A complication occurs where the general contract and accompanying general conditions between the owner and the prime contractor are expressly included as part of any subcontract. If any inconsistency exists between these two contracts, then an ambiguity has been created,[xv] since it is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing. In one instance, even though a cost plus or reimbursement type contract required a general contractor to pay its subcontractors before the owner reimbursed it, the owner’s general conditions required that before final payment became due, the general contractor was to submit an affidavit certifying that all subcontractors had been paid. This inconsistency was construed against the general contractor.[xvii] The Court found that when that provision of the subcontract was read in conjunction with the general contract and its conditions, a sufficient ambiguity existed which prevented the general contractor from effectively shifting the risk of the owner’s nonpayment to its subcontractors. To its dismay, the general contractor remained liable for the final payments owed to its subcontractors.
The bottom line is that risk shifting requires clarity, consistency within all of the documents in a transaction, and a knowledge of the law governing payment provisions in construction contracts. pay-when-paid clause, if intended to create a pre-condition to payment, as opposed to a reasonable time frame when payment will be made, must be free of any ambiguity and must establish by its express terms that payment by the owner is a condition precedent to any requirement on the part of one party to pay the other. By way of example, this provision has been held not to be a contingent payment clause:
Under no circumstances shall the contractor be obligated to pay the subcontractor until funds have been advanced by the owner.
The court also rejected a contractor’s argument that the following subcontract term shifted the risk of the owner’s nonpayment or delayed payment to the subcontractor:
Subcontractor shall be entitled to receive all progress payments and the final payment within ten working days after contractor receives payment for such from the owner, except as otherwise provided in the conditions.
However, the following cited definitive provisions have been upheld:
A Final payment, inclusive of retention, shall be made within thirty (30) days of completion of the construction project, acceptance of same by the owner, and as a condition precedent, receipt of final payment of subcontractor from the owner.
When all work has been finally accepted by the Architect and…, final payment is contingent upon payment to the Contractor and shall be made within thirty (30) days after said payment from the Owner, provided the Subcontractor has previously furnished complete releases of lien and evidence of paid material bills.
Sureties are also not immune from this predicament. They may find out too late that the language set forth in their bonds may not be sufficient to protect them from claims by subcontractors for payment. Often, payment bonds furnished by a surety to a contractor contain the legend specified in section 713.245, Florida Statutes, for conditional payment bonds (bonds which condition payment to a subcontractor upon payment to the contractor):
This bond only covers claims of subcontractors, sub-subcontractors, suppliers, and laborers to the extent the contractor has been paid for the labor, services, or materials provided by such persons. This bond does not preclude you from serving a notice to owner or filing a claim of lien on this project.
Although the form of bond may comport with the statutory requirements, the bond will, nevertheless, be treated as a payment bond under section 713.23, Florida Statutes, as to lienors having no pay-when-paid clause in their subcontract. While it has been asserted that the bonds must be deemed conditionally restricted because they contain the above statutory legend limiting coverage to instances where an owner has paid the general contractor, this argument has been rejected in light of the first sentence of section 713.245(1), which reads:
Notwithstanding any provisions of ss. 713.23 and 713.24 to the contrary, if the contractor’s written contractual obligation to pay lienors is expressly conditioned upon and limited to the payments made by the owner to the contractor, the duty of the surety to pay lienors will be coextensive with the duty of the contractor to pay…
Recognizing that the protection of section 713.245 does not arise unless express conditional payment language is contained in the general contractor’s actual subcontract, it has been held that the mere presence of such 713.245 language within a bond will not free the surety from having to pay up when its principal’s underlying contract did not contain express and unambiguous contingent payment language.[xxiv] In the absence of such conditional language, and provided the bonds comply with section 713.23, they will be considered, construed, and applied as unconditional 713.23 bonds.[xxv] Thus, under the present statutory scheme, a surety shall be liable to the same extent as the contractor.
Too often, more time is spent bidding a project than actually reviewing the agreement which formalizes a party’s selection to perform the work. As often, pay-when-paid provisions are not discovered or really understood until the parties are well into a job. By then, it is normally too late and too costly to do what could have and should have done at contract negotiation.
Get Paid Even if You Have a Pay-when-Paid Provision
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.