What Happens to a Pay When Paid Clause When the Prime Contract is Incorporated?

by | Jul 8, 2020 | Contracts

Contingent payment clauses, commonly referred to as “pay when paid”, can be found in almost all Florida subcontracts.  Such clauses require an owner to make payment to a contractor first before the contractor has a corresponding obligation to pay a subcontractor or supplier.

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.  On the other hand, it is no less disastrous for a subcontractor to have to pay all of its sub-subcontractors, suppliers, and personnel out-of-pocket. So, who should have to take on the risk of non-payment from the owner?

Florida courts generally find that “pay when paid” provisions are enforceable to shift the risk of non-payment to subcontractors, however in order to do so, the language in the contract must be completely clear and absent of any doubt as to what the parties intended. To accomplish this, courts have insisted certain “magic words” be included in “pay when paid” provisions to be enforceable. As such, AIA forms, as well as any number of subcontracts, will include language to ensure the risk of non-payment is in fact shifted downstream. But even when the “magic words” are utilized correctly, all hope is not lost for the subcontractor and the general contractor may still be on the hook.

Almost all subcontracts incorporate the direct or “prime” contract by reference. The effect of this incorporation is to make the terms of the owner-contractor contract applicable to the subcontract as well.  Such incorporation can have unintended consequences for the pay-when-paid terms of the subcontract.

Specifically, Florida courts have found that when the A201 2017 General Conditions are incorporated into a subcontract, this will render an otherwise valid “pay when paid” provision unclear and ambiguous. This is because these general conditions include certain language requiring the general contractor to pay all downstream contractors and suppliers before the owner is required to issue final payment, completely contradicting any risk shifting language in a corresponding subcontract. Due to this conflict, courts find that the “pay when paid” provision will be interpreted to only shift the risk on non-payment to the subcontractor for a “reasonable time.” Therefore, the general contractor will eventually be obligated to pay its subcontractor regardless of whether the owner ever issues payment for the subcontractor’s work. Even when A201 2017 General Conditions are not a part of either the sub or prime contract, other language, which conflicts with the “pay when paid” requirement, may also be found insufficient to shift the risk of non-payment on to the subcontractor.

Contractors attempt to circumvent this by inserting language into the subcontract which states that in the event of a conflict between the subcontract and the incorporated prime contract, the terms of the subcontract will prevail. However, this tactic has had varying degrees of success, with many courts refusing to ignore language which directly contradicts the risk shifting language of the subcontract and holding the general contractor to a reasonable time standard to pay its subcontractor.

Navigating the nuances of “pay when paid” clauses is a confusing and complex process. Subcontractors and general contractors alike would be wise to consult a construction law attorney before signing or presenting any contract that shifts or attempts to shift the risk of non-payment on to another party.

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