Pay-if-Paid Provisions in Construction Subcontracts: They Are Not All Created Equal
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Subcontractors are often stuck in a situation where the general contractor refuses to pay them because the general contractor has not been paid by the owner. In support of their refusal to pay, general contractors may rely on a “pay-if-paid” provision in the subcontract. Due to the risk of nonpayment, many subcontractors are reluctant to agree to such a provision. However, agreeing to a pay-if-paid provision may be necessary if the subcontractor wants the work.
In the event the subcontractor agrees to a pay-if-paid provision, and the general contractor refuses to pay, the subcontractor may still be able to maneuver around the provision and get paid.
What is a Pay-if-Paid Provision?
Construction contracts may contain either a pay-if-paid provision or a pay-when-paid provision. Both provisions are considered contingent payment clauses because they make payment to the subcontractor contingent on the general contractor receiving payment from the owner.
Although they may sound similar, a pay-if-paid provision is less subcontractor friendly because it shifts the risk of nonpayment from the general contractor to the subcontractor. Essentially, if the subcontract contains a pay-if-paid provision, the general contractor has no duty to pay its subcontractors unless and until the owner pays the general contractor. An example of a pay-if-pay provision is as follows: “The General Contractor’s receipt of payment from the Owner is a condition precedent to the General Contractor’s obligation to make payment to the Subcontractor; the Subcontractor expressly assumes the risk of the Owner’s nonpayment.”
On the other hand, a pay-when-paid provision only controls the timing of when a subcontractor will be paid. Pay-when-paid provisions provide that a subcontractor will be paid within a fixed period of time after the owner pays the general contractor. In the event the owner fails to pay the general contractor, the general contractor still has a duty to pay the subcontractor within a reasonable period of time. An example of a pay-when-paid provision is as follows: “The Subcontractor shall be paid within seven (7) days of the General Contractor’s receipt of payment from the Owner.”
Is the Pay-if-Paid Provision Enforceable?
Although disfavored by Florida courts, pay-if-paid provisions are enforceable, if the risk-shifting language is clear and unambiguous. For example, Florida courts have found pay-if-paid provisions enforceable when they contain the language “contingent upon,” “condition precedent,” or “no payment shall be owed to the subcontractor unless the general contractor is paid by the owner.”
Florida courts have also held that “risk-shifting provisions are susceptible to only two possible interpretations. If a provision is clear and unambiguous, it is interpreted as setting a condition precedent to the general contractor’s obligation to pay. If a provision is ambiguous, it is interpreted as fixing a reasonable time for the general contractor to pay.” DEC Elec., Inc. v. Raphael Const. Corp., 558 So. 2d 427, 429 (Fla. 1990).
Therefore, if the pay-if-paid provision is ambiguous, it will be unenforceable, and the general contractor will have a duty to pay the subcontractor within a reasonable time, regardless of payment from the owner.
Does the Subcontract Incorporate the Prime Contract?
Even if the pay-if-paid provision is enforceable, the subcontractor may still be able to maneuver around the consequences of a pay-if-paid provision and get paid.
In some cases, the subcontract will incorporate the prime contract (owner/general contractor agreement) by reference. If the subcontract contains an incorporation by reference clause, the prime contract will be interpreted as being part of the subcontract. OBS Co. v. Pace Const. Corp., 558 So. 2d 404, 406 (Fla. 1990) (“It is a generally accepted rule of contract law that, where a writing expressly refers to and sufficiently describes another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing.”).
Many prime contracts require the general contractor to pay its subcontractors before the owner provides reimbursement. Usually, in order to obtain reimbursement from the owner, general contractors are required to submit an affidavit to the owner, stating that its subcontractors have been paid in full. If the prime contract contains such a reimbursement type of clause, the prime contract, when read in conjunction with the pay-if-paid provision in the subcontract, will create an ambiguity.
This was the situation in OBS Co. v. Pace Construction Corp., where the Florida Supreme Court held that “such ambiguity must be resolved against the general contractor.” The ambiguity prevented the pay-if-paid provision from “effectively shifting the risk of the owner’s nonpayment” from the general contractor to the subcontractor. As a result, the general contractor was required to make final payment to the subcontractor within a reasonable time, even though the general contractor was not paid by the owner. Id. at 406-08.
Generally, Florida courts will enforce unambiguous pay-if-paid provisions. However, even if the pay-if-paid provision is properly worded, subcontractors may be able to maneauver around the provision and get paid, if the subcontract incorporates the prime contract and there is an ambiguity between the payment clauses in both contracts.
- James O. “Joby” Birr, Esq.
- Melissa G. Murrin, JD Candidate