Do you review the payment terms in your contracts? Do they contain a Pay-if-Paid clause? Did you know that this clause can bar your claim if the owner does not pay the general contractor? Pay-if-paid clauses can be very complicated, but well worth reviewing so that you can adequately gauge your risk before you take on a project.

A recent case highlights the problems that a pay-if-paid clause can cause. A federal Court of Appeal recently ruled that a subcontractor would not be paid if the general contractor was not paid. In this case, the general contractor demanded $6.5 million from the owner. Of this amount, the $5 million was owed to subcontractors. The general contractor sued the owner and the subcontractors pursued claims against the general contractor’s bond.

The general contractor’s bonding company refused to pay the subcontractors, claiming that the contract only required payment to the subcontractors once the owner paid the general contractor. The trial court ruled in favor of the subcontractors, requiring the surety to pay the subcontractors’ claims.

The surety appealed and the appellate court reversed, finding that the contract contained a valid pay-if-paid clause. The court held that the general contractor was not obligated to pay the subcontractors until it was paid.

This litigation took several years to work its way through the court system. And, the two courts involved took different positions on whether the contract contained a valid pay-if-paid clause. Needless to say, the pay-if-paid clauses can be tough to understand.

Knowing that your contract contains a pay-if-paid clause, and understanding what it means, can be very important in assessing the amount of risk you are facing when taking on a project.