I’ve reviewed three construction contracts this week and all three of them contained a pay-if-paid clause. Are you signing contracts with pay-if-paid clauses? Here are some suggestions to minimize your risk with pay-if-paid clauses.
What is a pay-if-paid clause?
Pay-if paid clauses eliminate the general contractor’s obligation to pay subcontractors if the general contractor does not get paid. Courts reviewing these clauses have found that a subcontractor that signs a contract with a pay-if-paid clause has assumed the risk of the owner’s credit worthiness and has waived its rights to payment from the general contractor if the owner’s financing dries up.
What does a pay-if-paid clause they look like?
The clauses can take any number of forms, but one I frequently see looks like:
The Owner’s payment to General Contractor for Subcontractor’s work is a condition precedent to General Contractor’s obligation to make any progress or final payment to Subcontractor, including retainage. Subcontractor acknowledges that it relies on the credit of the Owner, and not the Contractor, for payment for the Subcontractor’s work.
What can you do about pay-if-paid clauses?
- Your first line of defense against these clauses is to ask for a change in the contract.
- If the general contractor refuses, ask for documentation on the financing for the project. You are well within your rights to explain that a pay-if-paid clause puts the burden on you to know the owner’s financing capabilities and you are entitled to that information.
- You could ask to modify the clause to allow for an assignment of the general contractor’s contract rights against the owner.
- You could also ask to modify the clause to clarify that you retain your lien and bond claim rights should payment not be made.
Pay-if-paid clauses are serious business and you should review your construction contracts very carefully. If you do find a pay-if-paid clause, visit with an experienced construction attorney to discuss your options to protect your rights to payment.