Troublesome Contract Clauses: Pay-If-Paid Clause

Contract SignatureCraig Martin, Attorney with Lamson, Dugan & Murray, discussed several troublesome contract clauses that contractors need to be aware of during his presentation at the Construction Law Seminar held March 10th.

One of these is the Pay-If-Paid clause. These clauses eliminate the obligation to pay the subcontractor until the general contractor is paid by the owner. Mr. Martin pointed out that, normally, a party to a contract must perform its obligations under the contract in a “reasonable time” if the contract does not expressly require performance within a particular time. This would include the obligation to make payment for any labor or materials furnished under the contract. Mr. Martin notes that “while pay-if-paid clauses can create tremendous problems for subcontractors, they are enforceable.”

An example of a common Pay-if-Paid contract clause is AIA A201 Section 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.

When you see this type of clause in any subcontract you are considering, you need to either investigate the owner’s ability to complete and pay for the job or negotiate alternative language in the subcontract. Possible alternative language includes:

  • Modify the Pay-If-Paid clause to provide for an assignment of the contractor’s contract rights as against the owner.
  • Modify the Pay-If-Paid clause to provide for payment to the subcontractor in the event nonpayment is not the subcontractor’s fault.
  • Modify the Pay-if-Paid clause to provide the condition precedent terminates after a finite time.
  • Modify the Pay-if-Paid clause to provide that the subcontractor retains lien and bond rights.

Detailed review of any contract you are considering is very important. Knowing what terms and conditions the contract contains and understanding what they mean is key in assessing your risk with any new project contemplated.  You can find more information on this and other topics at Craig’s Construction Contractor Advisor blog.

The information contained in this blog post is for educational purposes only as well as to give you general information and a general understanding of the topic, not to provide specific legal advice. For more specific information on this, please contact Craig Martin, Lamson, Dugan & Murray, LLP, (402) 397-7300.