February 2003

Understanding payment provisions | Legal Ease

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Understanding payment provisions

by M. Sindy Felin and Stephen M. Phillips
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Subcontract payment provisions commonly state that a subcontractor is not entitled to receive payment until the general contractor has been paid. Although this ubiquitous provision may appear to be substantively the same from contract to contract, what appears to be an insignificant variation in the exact language might determine whether a provision is viewed as a pay-when-paid versus pay-if-paid clause.

If a payment provision is considered a pay-when-paid clause, courts in most states have ruled that a subcontractor still will be entitled to payment from a general contractor after a reasonable period even if the building owner has not paid the general contractor. Although there is no set time period to define what constitutes a reasonable period, the critical legal point is that the subcontractor ultimately is entitled to payment.

If a payment clause is a pay-if-paid provision, it is a contingent-payment provision and the subcontractor is not entitled to payment unless the contingency, or condition precedent, of payment by an owner to a general contractor has occurred. If an owner does not pay a general contractor because of insolvency, the general contractor’s fault or any other cause, the subcontractor still is not legally entitled to payment.

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