Florida pay when paid and pay if paid provisions are known as contingent payment clauses. These are an attempt to shift the risk of the owner’s non-payment from the general contractor to the subs and suppliers. Because these clauses can seriously impact a lower-tier party’s ability to recover payment, such clauses are enforceable in Florida but are strictly regulated.
Florida contingent payment clauses
Most states set a clear divide between pay-if-paid and pay-when-paid provisions. Florida, on the other hand, categorizes both under the term pay-when-paid. But depending on the clarity and language of the clause, it may be deemed a pay-if-paid clause. I know, the treatment of Florida contingent payment clauses aren’t exactly a model of clarity. This article will try to clear things up a bit.
For a deep dive on contingent payment provisions:
A pay-if-paid provision is the more dangerous of the two clauses. This will operate as a shift of the entire risk of nonpayment to the subs and suppliers. Meaning the subcontractor will not be entitled to payment at all until the GC is paid by the owner. In Florida, these clauses are enforceable, but under very specific circumstances.
The language contained within the provisions must be crystal clear. It should be written in a way that doesn’t mislead the reader and definitively sets out that there is a condition precedent to payment. The responsibility of expressing clarity is on the general contractor. According to Aetna Casualty & Surety Co, v. Warren Bros. Co., when the intent to shift the risk of non-payment is not clearly expressed, it will be read to require payment within a reasonable time; i.e. a pay when paid clause.
Florida courts have generally enforced pay when paid clauses. They are the “less intense version” of a pay if paid clause. The reason is that they are treated as merely fixing a reasonable time for payment. Essentially, once payment is made by the owner to the GC, they are required to release these funds within a specific time period. That is of course, as long as the reason for non-payment from the owner isn’t due to the fault of the sub.
The key to an enforceable “pay if paid” clause is using the magic words
The court in Bentley Constr. Dev. v. All Phase Electric reviewed the language of such a clause and identified certain “magic words” that should be used when drafting such clauses. The provision in question stated that
“Subcontractors shall be entitled to receive all progress and final payment within ten working days after the contractor receives payment from the owner.”
At first glance, this seems pretty clear cut. But since the courts strictly enforce these clauses, it was considered to be ambiguous and unenforceable as a pay if paid clause. The language didn’t clearly express that payment from the owner was the condition precedent to payment. It merely set a reasonable time of payment after the owner released funds. They pointed out magic words that should be included, such as “condition precedent,” or “contingent upon” or some other comparable statement.
Ways to get around an otherwise enforceable clause
If a subcontractor has signed a contract with an enforceable pay if paid clause, all hope is not lost. There are other ways to ensure payment.
Look for incorporation language
There have been a few instances where the subcontract did include all the magic words but was eventually deemed unenforceable. This was the case of International Eng Serv. v. Scherer Construction. The clause, in this case, stated that “all progress and final payment to Subcontractor are contingent upon and subject to… contractor’s receipt of payment to the owner.”
This is crystal clear language stating that payment was contingent upon payment from the owner. The problem here was that the subcontract incorporated the terms of the prime contract. The prime contract stated that before the owner had to pay the GC, the GC had to pay all of the subcontractors. Read side by side, these provisions conflict with one another, resulting in the clause being ambiguous.
Perfect the lien or bond claim early
By signing a contract with conditional payment language, the subcontractor is accepting the risk that the owner may not pay and gives up any contractual right to payment. But that doesn’t mean it affects any statutory rights to payment such as mechanics lien and bond claims. Perfecting these claims establish alternative methods to collect payment for labor or materials furnished.
Furthermore, even if the contractor is off the hook for payment, doesn’t mean their surety is. Florida court stated in Everett Painting v. Padula that sureties can’t be protected by a pay if paid clause. The one exception to this being conditional bonds, which aren’t even allowed on private projects anyways.
As we’ve seen, pay-if and pay-when provisions are enforceable in the state of Florida. Yet they are subject to a strict interpretation of the language to be valid. Florida subcontractors should be cautious when presented with a contract that contains such language. Assuming the risk of non-payment by the owner is just one more risk on a project that subs and suppliers shouldn’t have to bear.