Pay When Paid Provisions in Construction Contracts
By Christopher M. Cobb January 6, 2020 Posted in Construction Law Share
A “pay when paid” or “pay if paid” provision is often used in construction contracts to shift the risk of payment by the owner down to the subcontractors. They are sometimes referred to as contingent payment clauses and typically makes the subcontractor’s payment contingent upon the payment of the contractor by the owner. More specifically, the goal of these provisions is that in the event that the owner does not make a payment to the contractor, then the general contractor does not have to make the payment corresponding to the same work to the subcontractors and thereby limits the liability of the general contractor. Many subcontractors are reluctant to accept “pay if paid” provisions, but it can be a necessity on a large project because the general contractor may not be able to finance paying the subcontractors with a lack of payment from the owner. These types of conditional payment provisions are often disfavored by courts, but if they are properly worded, then they are valid and enforceable in Florida.
The seminal case regarding “pay if paid” provisions in Florida is OBS Co. v. Pace Constr. Corp., 558 So. 2d 404 (Fla. 1990), where the Florida Supreme Court ruled that in order for a “pay if paid” provision to be enforceable, it must clearly shift the risk of payment from the contractor to the subcontractor. Beyond this more general principle, this case is interesting because the “pay if paid” provision in the subcontract was clear and unambiguous. Id. However, the subcontract also incorporated the prime contract, which required the contractor to pay its subcontractors before it would receive payment from the owner. Id. The Court held that the incorporation of the prime contract payment provision created an ambiguity when read in conjunction with the subcontract’s “pay if paid” provision. Id.
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. Aetna Casualty & Surety Co. v. Warren Bros. Co., Div. of Ashland Oil, Inc., 355 So. 2d 785 (Fla. 1978). “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. In purported risk-shifting provisions between a contractor and subcontractor, the burden of clear expression is on the general contractor.” See DEC Electric, Inc. v. Raphael Constr. Corp., 558 So. 2d 427 (Fla. 1990).
Even if the “pay if paid” provision is valid and enforceable, the subcontractor can still lien the project or recover against a payment bond (i.e. a payment bond pursuant to Section 713.23, Florida Statutes) unless there is a conditional payment bond for the project pursuant to Section 713.245, Florida Statutes. See OBS, 558 So. 2d 404 (Fla. 1990). It is paramount for each party to analyze the risk associated with executing a contract that contains a “pay when paid” clause and that the party drafting the contract be clear and unambiguous in the condition’s precedent.
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