“Pay when paid” clauses are clauses found in many construction contracts that state that the contractor will pay his subcontractor only if and/or when the contractor receives payment from the owner. Are these clauses enforceable? The answer depends on (1) what state you are in and (2) what choice of law provision is contained in your construction contract.
A limited number of states do honor “pay when paid” clauses under the theory that the parties are usually sophisticated parties who negotiated the contract terms and as such they are duty bound to honor those terms. When such a clause is enforced, it can prove fatal in a case where the owner files bankruptcy or otherwise defaults on its payments to the general contractor.
In North Carolina, such clauses are unenforceable as against public policy.
Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with whom it contracts. Payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, and an agreement to the contrary is unenforceable.
Does that mean that, if you are a subcontractor, you don’t need to worry about such “pay when paid” clauses in North Carolina? Not necessarily. It depends on what law is the law that will be applied by the court. If your contract states that the law of another state will apply, you need to know if that state is one in which “pay when paid” clauses are enforceable. In some states, such as Virginia, the contract is king and whatever the contract says will be enforced. Such clauses are also generally enforceable in a few other states such as Connecticut and Michigan.
Therefore, it is important to know not only what your contract says, but what state’s law will apply to your contract.
Because case law and statutes change the law regularly, consult a licensed attorney in the jurisdiction you are concerned about to learn the latest status of contingent payment clauses in that jurisdiction.
Often, people in the construction industry don’t bother to hire an attorney until they are in trouble. An owner isn’t paying them. A subcontractor has filed a lien on the property. Another contractor or homeowner is suing them. When your back is up against the wall, how do you find and use a construction attorney to your best advantage?
In the article, Furlong discusses how to communicate expectations, bottom line deal breakers, and the like with your attorney both prior to hiring him/her and during the matter itself. Read it. Know it. Use it. Your attorney will thank you and so will your wallet.
As I noted in an earlier post about risks related to designing buildings for LEED certification, those involved in construction should proceed cautiously in designing to certain LEED standards.
A recent Insurance Journal article discusses insurance and liability risks for a designer or contractor if he guarantees a certain level of “green” performance in his construction contract.
“If you’re an architect, engineer, or contractor, and you’re guaranteeing to your client that the building will be Gold certified by the U.S. Green Building Council, you’re opening up a pretty big can of worms.”
You should never “guarantee” any performance to keep your risks minimized, your insurance in place, and your attorney happy. This article is another reminder to be especially cautious in green construction, and to not make promises that you may not be able to keep.