Pay-if-paid clauses are a type of contingent payment provision that can cause all sorts of problems for subcontractors. These clauses put subcontractors at full risk in case of property owner nonpayment to the general contractor. Each state interprets these clauses differently, and in some states, they are completely prohibited in construction contracts as against public policy. In Pennsylvania, pay-if-paid clauses are generally held to be enforceable as long as they meet certain requirements.
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Contingent payment provisions overview
There are two types of contingent payment provisions that may be included in a construction contract. They’re referred to as pay-if-paid clauses and pay-when-pay clauses. The difference between the two is subtle yet impactful.
A pay-if-paid clause shifts the risk of non-payment by the owner from the general contractor to a subcontractor. A valid pay-if-paid clause will create an express condition precedent to payment. Meaning that the obligation to pay is conditioned on the GC receiving payment from the property owner.
On the other hand, a pay-when-paid clause is merely a timing mechanism for payment. If included in the contract, then this clause sets a reasonable amount of time in which payment must be made. Every state has its own approach to these clauses, let’s take a look at how Pennsylvania handles pay-if-paid clauses.
Pennsylvania approach to contingent payment clauses
The state of Pennsylvania has established that there is nothing inherently unfair about pay-if-paid clauses that shift the risk of non-payment. However, in order to be enforceable, the language must be clear and unequivocal. This is based on the “plain meaning” approach of contract interpretation in Pennsylvania. The meaning of the provisions is to be determined by its contents alone. The clause should speak for itself, and no other interpretations or meanings can be given other than what is expressed.
Enforceability of pay-if-paid clauses
The Pennsylvania courts have upheld pay-if-paid clauses as enforceable on both private and public construction projects. However, as hinted to above, these clauses must explicitly establish that the parties intended the clause to act as a condition precedent to payment.
A payment clause that is lacking this clarity will be interpreted as a pay-when-paid clause. Which, as stated above, merely establishes a reasonable time for payment. There are no “magic words” to ensure the provision sets a condition precedent, and the contract provisions will be examined as a whole. Meaning even if the clause is perfectly drafted, any other provisions that modify or contradict the clause will invalidate the condition precedent.
When a pay-if-paid clause isn’t a pay-if-paid clause
Take the holding in Sloan Co. v. Liberty Mutual Ins. Co. as a perfect example. In that case, the clause presumably created multiple conditions precedent. The clause in question stated that the final payment shall be made within 30 days after the last of one of the following occurs, “the occurrence of which shall be conditions precedent to such final payment.” The clause then lists seven different events including; “Owner shall have accepted the Work and final payment thereunder to Contractor,” and “Contractor shall have received final payment from Owner for Subcontractor’s Work.”
That seems pretty cut and dry. All of these events, which shall be conditions precedent, must occur in order for final payment to become due. However, there was a later provision that stated: “if within 6 months of the date that final payment is due, to Contractor by Owner, Subcontractor has not received final payment for its Work, Subcontractor may pursue its claim against Contractor and its Surety for final payment.”
Courts take the entire contract language into account when determining whether there is enough intent to establish a condition precedent. When read in the light of the second provision which specifies when the subcontractor can sue the contractor “softens the condition precedent.” The court determined that the contract, taken as a whole, suggests that the contract only establishes a reasonable time for payment. Meaning its a pay-when-paid clause. It goes to show that even using words such as “condition precedent” or “if and only if” are not enough to establish a valid pay-if-paid clause.
Reconciling prompt payment provisions with a pay-if-paid clause
So there are two separate sets of statutes that regulate prompt payment on both public and private projects. The PA Prompt Payment Act covers public works projects whose contract price exceeds $50,000. While the Contractor and Subcontractor Payment Act regulates all private construction projects minus any residential projects of 6 or fewer units. Any contracts that fall under the regulations of either of these laws will be subject to their payment terms. So how are these acts and the enforceability of pay-if-paid clauses dealt with?
A close reading of both suggests that pay-if-paid clauses are, indeed, enforceable. Specifically 73 Pa. Stat. §507(c) and 62 Pa. Con. Stat. §3933(c), which each contains almost identical language regarding the timing of payments.
When a subcontractor has performed in accordance with the provisions of the contract, a contractor shall pay to the sub… the full or proportional amount received for each such subcontractor’s work or materials, based on work completed or service provided under the subcontract, 14 days after receipt of a progress payment.
Under the prompt pay provisions for public projects, there is an additional caveat. It states that payment should be made 14 days after receipt of each payment, or receipt of the subcontractor’s invoice, whichever is later. A strict reading of these provisions implies that contractors and subs aren’t required to pay until they received payment from above.
There is, however, a built-in protections to subcontracts that fall under the prompt payment protections. Each has an additional provision that requires the higher-tiered party to disclose the due dates for receipt of payment from the owner or contractor. That way subcontractors can be informed about when payment should be due to them and take the appropriate measures when payment is untimely. Failure to accurately provide these dates will cause the statutory payment terms to kick in, despite the contract terms.
Subcontractors should try to avoid both pay-if-paid and pay-when-paid clauses as much as possible. If unable to negotiate the clause out of the contract, try to set a reasonable time for payment. In that case, if there are forces stalling payments that are out of their control, there is still a definite period of time in which they will get paid. On the flip side of the coin, general contractors who wish to include a pay-if-paid provision, they need to be sure that the language establishing a condition precedent to payment is crystal clear.