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Why is it legal to use the no pay till we are paid system?

Hi, my partner is under significant financial strain as a result of being an associate employed with an international firm based in England (with associates in USA, Asia and Australia) that uses the “no pay until we get paid” provision. It is not unusual to be waiting well for over 3 months for payment on invoices for work that he’s performed on behalf of this company, This is the clause in their payment terms: “Payment of all correctly authorised Associate invoices shall be made within thirty (30) days of the month end in which the correct and valid invoice was received, as long as the client has paid xxxx.. Xxxx will use its best endeavours to collect payment from clients and pay the associate on the due date” (I’ve xxx the company’s name.) I want to know if this is legal? It seems to me that it’s a rather shabby way of treating people for work they’ve done. Your feedback would be appreciated. Thankyou, Amanda

1 reply

Oct 30, 2019

In New York, pay when paid clauses are legal, but they have their limits. New York courts have held that pay when paid provisions can delay payment - but only for a reasonable amount of time. Put a little differently: New York pay when paid provisions are time-shifting, and not risk-shifting. So, no matter what, payment must be made at some point. But, the timeframe for making payment can be pushed back some. We've discussed pay when paid clauses quite a bit on the Levelset blog, so here are some resources I think might be helpful when looking into them: - New York Pay When Paid Clauses Have Their Limits - Pay-When-Paid and Pay-If-Paid Clauses: An Introduction - Pay If Paid or Pay When Paid: What’s the Difference, and Why Does it Matter?

Why are pay when paid provisions allowable at all?

Generally, the freedom to contract is pretty strongly protected. So, for the most part, as long as two parties can agree to the terms of a contract, those terms will be enforced. Now, in some cases, state law or federal law steps in and says certain terms are or are not allowable - but, those restrictions are generally reserved for situations where the contract is against strongly held public policy. Practically, this is why pay if paid provisions are illegal or unenforceable in a large number of states. A pay if paid provision pushes the risk of nonpayment onto the party receiving payment - so, if their customer never gets paid, then their customer never owes them payment.

Pay when paid contracts in construction

Pay when paid clauses are easier to stomach since, even if payment never comes, a customer will have to eventually make payment "within a reasonable time." These types of clauses are especially prevalent in construction. Typically, a business won't have the cash on hand to pay their subcontractors or suppliers until the business is paid, themselves. As a result, it's common for a business to want to wait until they've been paid until they're required to make payment so the business doesn't have to go out of pocket. This sometimes becomes reflected in a pay when paid clause, and other times it's unofficially understood between parties. In either case, it puts a lot of pressure on individuals and businesses who aren't well-situated to handle extra risk and delays.

Bottom line

You're right though. Forcing an individual or business to wait on payment for reasons that are entirely out of their control doesn't seem particularly fair - and it's a shabby way to treat subcontractors who aren't prepared to handle those terms. But, for some businesses, pay when paid terms are perfectly acceptable and worth the cost of doing business - especially since payment will be required eventually.

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