I received a number of calls about an earlier post commenting on the enforceability of pay-if-paid clauses. So, I thought I’d take the opportunity to discuss them in more detail.

 What is a pay-if-paid clause?

A pay-if-paid clause provides that a subcontractor will be paid only if the contractor is paid. Under these clauses, each contracting party bears the risk of loss only for its own work.

In contrast, pay-when-paid clauses govern the timing of a contractor’s payment obligation to the subcontractor, usually by indicating that the subcontractor will be paid within some fixed time period after the contract has been paid. Pay-when-paid clauses do not excuse a contractor’s ultimate liability if it does not receive payment from the upstream contractor or owner.

 What does a pay-if-paid clause look like?

There is no uniform language for a pay-if-paid clause, but they usually convey that the subcontractor assumes the risk of the owner’s nonpayment. A typical clause might say:

Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor

expressly assumes the risk of the owner’s nonpayment and the subcontract price includes the risk.

What is the impact of a pay-if-paid clause?

If your contract has an enforceable pay-if-paid clause and the upstream contractor does not get paid, you do not get paid. And, there are some recent cases that also hold that the upstream contractor’s bonding company does not have to satisfy your claim if the upstream contractor is not paid.

Pay-if-paid clauses are fair game in a construction contract. Now that you know what they mean and what they look like, you will be in a better position to gauge your risk and price your contract accordingly.