Dean Kaplan of the Kaplan Group writes a column on InsideARM.com, and he recently posted on a topic that is especially familiar to controllers and credit managers int eh construction industry. His post: Negotiating the Nightmare of “You’ll Get Paid When We Get Paid!”
Dean’s post was not about “pay when paid” and “pay if paid” clauses, which are contractual provisions common in construction contracts that frequently handcuff project participants when trying to collect on their invoices. However, the fact that the financial crisis has created a “pay when paid” excuse problem for normal small businesses underscores how prevalent the problem must be in the construction industry, where there is an actual contractual justification for the behavior.
When Faced With “Pay When Paid” Argument – Understand Your Rights
The first thing you need to do when confronted with a “pay when paid” argument is to really understand your obligations and rights in the situation. This involves thinking through two key things:
1) Do you have a pay-when-paid or a pay-if-paid clause? While the difference may seem trivial to a lay person, it’s a big deal to lawyers and the legal world. If your construction contract contains a “pay when paid” clause, regardless of whether your customer ever receives payment, your customer is most likely not excused from making payment to you within a “reasonable” time. A “pay if paid” clause, however, may absolutely require your customer receive payment before you have any legal right whatsoever to get paid.
2) How do courts treat these clauses in your state? Now that you understand the nature of the contractual clause at play, it’s now time to understand how the courts will treat it. Every state is different in how these clauses are read, with some states upholding them to the letter and other states considering them inequitable and treating them as invalid. You should know what is the case in the state of the construction project (or the jurisdiction applicable to your contract).
Don’t Wait Too Long To File Your Mechanics Lien or Bond Claim
The “pay when paid” or “pay if paid” clauses in your contract create a huge complexity in the mechanics lien and bond claim world, and to be honest, it isn’t exactly clear how a court would adjudicate some potential scenarios. We’ve written about some of these scenarios in this blog post: A Catch 22: Pay When Paid Clauses Do Not Extend The Lien Period.
While there is a lot unclear about these situations, one thing appears clear: Under no circumstances will a contractual clause extend your mechanics lien or bond claim period.
If unpaid, therefore, you should keep track of your mechanics lien deadline and get your mechanics lien claim filed before that deadline, irrespective of your contract’s payment clauses.
Learn more about payment speed in How Long Does a Contractor Have to Pay a Subcontractor?