As a reminder, pay-if-paid provisions shift the risk of the Owner’s insolvency from the general contractor to the subcontractor. If the Owner does not pay the general contractor, the general contractor has no obligation to pay the subcontractor. That can be a harsh result for a subcontractor who did good work and has no relationship with the Owner. Up front negotiation is the best way to address these risks in subcontracts. Contractors may be open to (or welcome) some of the following alternate phrases:
Prevention Doctrine: Contractors may not be able to rely on the pay-if-paid provision if their own defaults cause the Owner to withhold payment. Consider the following:
Receipt by Contractor of payment from the Owner for Subcontractor’s Work is a condition precedent to Contractor’s obligation to pay Subcontractor all progress, change order or final payments unless Contractor’s or its subcontractors’ actions have caused Owner’s failure or refusal to make payment to Contractor.
Pay-When-Paid Provision: Courts have attempted to limit the effect of pay-if-paid provisions by simply allowing the general contractor more time to pay, instead of an absolute out. Consider the following:
If Contractor does not receive payment from the Owner for Subcontractor’s Work for any cause that is not the fault of Subcontractor, Contractor shall pay Subcontractor within forty-five (45) days of when Contractor’s payment to Subcontractor would otherwise be due.
Limited Pay-if-Paid Provision: Subcontractors can shoulder the risk if their deficient work causes the Owner to withhold payment. Consider the following:
Receipt by Contractor of payment from the Owner for Subcontractor’s Work is a condition precedent to Contractor’s obligation to pay Subcontractor all progress, change order or final payments only if Subcontractor’s breach of this Agreement or deficient or delayed Work is the cause of Owner’s failure or refusal to pay Contractor for Subcontractor’s Work.
Anti-Pay-if-Paid Provision: Many lengthy subcontracts will include pay-if-paid provisions in multiple places (progress and final payment, changes, dispute resolution, etc.). In the event the parties agree to strike these provisions, it may be appropriate to include a catch-all phrase. Consider the following:
Receipt by Contractor of payment from the Owner for Subcontractor’s Work is not a condition precedent to Contractor’s obligation to pay Subcontractor all payments owed under this Subcontract. The Parties agree that this provision supersedes all others in this Agreement that condition payment to Subcontractor on Contractor’s receipt of payment from the Owner.
Subcontractors or Contractors may not have considered all of the previously described provisions in between the take it or leave it approach to pay-if-paid contracts. With some negotiation, they may be convinced to make an exception to their standard forms.
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