The bane of the commercial subcontractor’s accounts receivable is the “pay when paid” clause — once an inventive addition to a few general contractors’ forms, now the norm in form subcontracts offered on major projects.
The “pay when paid” clause provides that, notwithstanding any other contract provision, the general contractor need not make payment to the subcontractor until the project owner has paid the general. This essentially passes the risk of a cash flow pinch from the general to the subcontractor.
The question on most subcontractors’ lips: how enforceable are these clauses?
The short answer is that they are in fact enforceable between the parties, as are virtually all freely signed contracts’ clauses. A “pay when paid” clause establishes a contingency to the general contractor’s obligation to make payment, and the Virginia Supreme Court has consistently upheld such payment contingencies.
But subcontractors and suppliers should still be on the lookout for abuses of the “pay when paid” clause. Chief among these is the attitude that “pay when paid” is an industry standard that can be followed even when there is no express contractual provision. This attitude is nothing more than a mistaken view of the law, resorted to when the general would like to postpone payment without adequate excuse.
Secondly, like any contract contingency, a “pay when paid” clause will not avail the general contractor if the reason for the owner’s nonpayment is the general’s fault. And since fault on the part of any subcontractor is generally imputed to the general, if one subcontractor’s poor performance is holding up payment from the owner, the general will not be able to stave off efforts by blameless subs to recover payment. Instead, the burden falls upon the general to remediate the guilty sub’s work and to recoup all losses from the guilty party alone.
Finally, all subs should know that the deadlines established by the mechanic’s lien statute and by applicable payment bonds are not extended by “pay when paid” clauses. Liens and bond claims may be filed even if the general is properly entitled to withhold payment. Courts are split, however, on whether the sub may actually enforce a bond claim or mechanic’s lien to the point of obtaining payment. Some courts will allow the sub to retain the security of a lien or bond claim, but not to override the payment contingency entirely.
Attorneys:
Bernie Meyer
Scott Simmons
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