Enforceability of Contingent Payment Provisions in Construction Contracts
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Contingent payment provisions, often referred to as “pay if paid” or “pay when paid” provisions, are commonplace in subcontracts and lower tiered contracts. An often overlooked question that should be asked is, “Are they enforceable?” As is true with most questions in the law, the answer is, “It depends.” This Blog will focus on the enforceability of contingent payment provisions.
Contingent payment provisions are used in the construction industry to shift the risk of nonpayment by the owner from the contractor to the subcontractor or from the subcontractor to the lower tiers. More specifically, the goal of these provisions is that in the event the owner does not make a timely payment to the contractor for a particular item of work, then the contractor does not have to make the payment corresponding to the same work to the subcontractor that performed the work. Many subcontractors and lower tiers are reluctant to accept contingent payment provisions, but it can be a necessity on a larger project and is often a nonnegotiable term in the contract because the contractor may not be able to finance payment of the subcontractors when there is a lack of payment from the owner. Contingent payment provisions are disfavored by courts, but if they are properly worded, then they are enforceable in Florida.
The seminal case regarding contingent payment provisions in Florida is OBS Co., Inc. v. Pace Construction Corp., 558 So. 2d 404 (Fla. 1990), wherein the Florida Supreme Court noted that in order for a contingent payment provision to be enforceable, it must clearly shift the risk of nonpayment from the contractor to the subcontractor. Beyond this more general principle, this case is interesting because the contingent payment provision in the underlying subcontract was clear and unambiguous. Id. at 406. However, the subcontract also incorporated the prime contract, which required the contractor to pay its subcontractors before it could receive payment from the owner. Id. The Court held that the incorporation of the prime contract payment provisions created an ambiguity when read in conjunction with the subcontract’s contingent payment provision, and therefore, the contingent payment provision was unenforceable. Id. at 406-07. When the intent to shift the risk of nonpayment is not clearly expressed and ambiguity exists, then the provision must be read to require payment within a reasonable time. Id. at 407 (citing Aetna Casualty & Surety Co. v. Warren Brothers Co., 355 So. 2d 785,786 (Fla. 1978)). In order to be enforceable, the contingent payment provision must clearly and unambiguously express that payment by the owner to the contractor is a condition precedent to the contractor’s obligation to pay its subcontractor. See DEC Electric, Inc. v. Raphael Contruction Corp., 558 So. 2d 427, 429 (Fla. 1990).
It should be noted that the current version of the AIA General Conditions (i.e. AIA Document A201 – 2007, General Conditions of the Contract for Construction) contemplates that contingent payment provisions may be contained in the subcontracts and lower tier contracts. Section 9.6, titled “Progress Payments,” contains the following provision:
§ 9.6.2 The Contractor shall pay each Subcontractor no later than seven days after receipt of payment from the Owner the amount to which the Subcontractor is entitled, reflecting percentages actually retained from payments to the Contractor on account of the Subcontractor’s portion of the Work. The Contractor shall, by appropriate agreement with each Subcontractor, require each Subcontractor to make payments to Sub-subcontractors in a similar manner.
Particular attention should still be given to the language in the prime contract that may modify the general conditions even if the AIA General Conditions are incorporated into the contract documents on a project to be certain that no ambiguity is created by the language. Moreover, the AIA General Conditions should still be examined to determine whether any applicable modifications have been made to the document that could also create an ambiguity.
Florida and federal payment bond law is also an important consideration with regard to contingent payment provisions because many private and public projects (both Florida and federal) require payment bonds to be procured by the contractor. In the case of private projects, payment bonds are required by many owners to protect the owners from the risk of nonpayment by contractors to the subcontractors as well as nonpayment to the lower tiers, which may expose the project to construction liens. With regard to public projects, state and federal public owners are exempt from construction liens, but payments bonds are typically statutorily required to protect subcontractors and lower tiers for public policy reasons.
Most subcontracts on projects that require payment bonds contain contingent payment provisions, but these provisions are generally unenforceable with regard to a subcontractor’s or lower tiered entity’s ability to recover against the payment bond for nonpayment by the contactor or lower tiered payor. A contingent payment provision on a Florida private project that is protected by a payment bond issued pursuant to Section 713.23, Florida Statutes, will not prevent a subcontractor or lower tiered entity from recovering for nonpayment against the payment bond. See OBS, 558 So. 2d at 408. However, a valid contingent payment provision on a Florida private project protected by a payment bond issued pursuant to Section 713.245, Florida Statutes, referred to as a conditional payment bond, is enforceable to prevent the subcontractor or lower tiered entity from recovering for nonpayment against the payment bond. Payment bonds on Florida public projects issued pursuant to Section 255.05, Florida Statutes, are not shielded from liability by contingent payment provisions. Everett Painting Co., Inc. v. Padula & Wadsworth Construction, Inc., 856 So. 2d 1059, 1062 (Fla. 4th DCA 2003). Likewise, payment bonds on federal projects issued pursuant to the Miller Act (40 U.S.C. §§ 3131, et seq.) are not shielded from liability by contingent payment provisions. See, e.g., U.S. ex rel. T.M.S. Mech. Contractors, Inc. v. Millers Mut. Fire Ins. Co. of Tex., 942 F.2d 946, 949 n.6 (5th Cir. 1991).