In construction contracting subcontractors need to be aware of “pay-when-paid”(pay-if-paid) clauses in their contracts with general contractors. The purpose of these provisions is to make payment by the general contractor (GC) to the subcontractor (sub) conditioned upon the GC receiving payment from the owner.
Simply put, the GC wants to pay its sub for completed work only if it has received payment from the Owner. Even more simply put, the GC wants the sub to assume the risk that the Owner will not pay it for the sub’s work.
Florida Courts do not favor these provisions inasmuch as they seek to eliminate the GC’s obligation to pay a sub for its work until such time as payment is received from the Owner, if ever. Therefore, to fully eliminate a GC’s duty to pay its subs until it receives payment from the owner, if ever, the contract provision must be clear and unambiguous in setting forth that the GC’s payment to the sub is a “condition precedent to payment. ” In fact, it is recommended that such provision use the term “condition precedent” or “absolute condition precedent.” The burden of clearly expressing a condition precedent is on the the general contractor or other party seeking to invoke the provision.DEC Elecrtric v. Raphael Corp.558 So.2d 427, 429 (Fla. 1990).
With that in mind, the Courts generally interpret pay when paid provisions in one of two ways.
First, the court can find that the pay when paid clause is clear and unambiguous and therefore valid to render the GC’s obligation to pay its sub as expressly conditioned on its receipt of payment from the owner. While this interpretation is what the GC’s aim for when they put such provision in their contracts, it is not the favored interpretation by the Court, and Courts generally look to other factors to avoid finding that the pay when paid clause operates as an absolute condition precedent to potentially serve as a permanent bar to payment to the sub. (See OBS Co. v. Pace Constr. Corp., 558 So.2d 404 (Fla. 1990), where the Court looked to inconsistent provisions in an incorporated owner/GC contract to invalidate a paid when paid provision, Nicholas Acoustics v. H&M Constr. Co., 695 F.2d 839 (5th Cir 1983) where the Court found that pay when paid provision was inconsistent with owner GC contract requiring GC to make full payment to contractor and have liens released before GC was entitled to payment, and Premier Elec. Constr. Co. v. American Nat’l Bank of Chicago, 656 N.E. 2d 157, 164(Ill. App. Ct. 1995) where the Court found that paid when paid was inapplicable when there was an inconsistent contract provision requiring that subcontractor receive timely payments even if conflict arises between Owner and GC. See a more recent decision, holding otherwise,Universal Concrete Products v. Turner Const. Co., 595 F.3d 527, (Fed. App. 4th Cir Va. 2010) where the Court held that incorporation of ambiguous terms of prime contract did not deem pay-when-paid provision in subcontract ambiguous to find that payment by GC to sub was not expressly conditioned upon payment by Owner to GC.)
Also noteworthy, some Courts and practitioners have labeled these absolute condition precedents a “pay-if-paid” provision.
A second, and more favored interpretation by the Court, is that the pay when paid provision is simply a timing requirement. And that a GC may only withhold payment from its Sub for a reasonable amount of time should the GC not receive payment from the Owner. While there is no accepted definition of a “reasonable amount of time” multiple Courts have used 90 days/3 months.
In sum, the courts are not confined to the plain language of a “pay when paid” contract provision to determine its effect. The Court may resort to looking at the terms of an incorporated prime contract or the course of dealing between the parties to break the provision and find it only to be a simple timing requirement and not an absolute condition precedent. However, to give a GC the best chance to shift the risk of Owner non-payment to the sub, the GC should consult an attorney to review the “pay when paid” language it should use in its subcontracts.
Article by: Andrew Douglas, Esq., Andrew Douglas, P.A., 954.474.4420