When it comes to getting everyone paid on a construction project, there can oftentimes be a significant amount of risk and potential for nonpayment. In general, there is a hierarchy of who is most likely to get paid, and subcontractors are usually at the bottom of the totem poll.
This is especially true if the contract signed by the subcontractor includes a “Pay-if-Paid” or a “Pay-When-Paid” clause.
These clauses are stipulation in construction contracts that protect the contractor in case of nonpayment by the property owner by shifting the risk to the subcontractor.
The pay-if-paid clause expressly states that the contractor will only owe payment for services to the subcontractor if the contractor gets paid by the owner of the property. If the contractor does not get paid, then they have no obligation to pay the subcontractor for the services he or she provided on the project.
Similarly, the pay-when-paid clause states that the subcontractor will be entitled to payment for the work performed, but only in a specific period of time following the receipt of payment by the contractor from the owner.
These are oftentimes contentious clauses between contractors and subcontractors, and the enforceability of these type of clauses has been challenged on numerous occasions. As it stands, the enforceability varies from state to state.
In Florida, pay-if-paid clauses have been found to be enforceable through case law, but ONLY if they are clear and unambiguous. As long as the contract makes it clear that a pay-if-paid clause sets the precedent for payment, and does not attempt to mislead, then there is very little potential for a subcontractor to challenge the contract once signed.
Pay-when-paid clauses are generally always enforceable in Florida.
If you are a contractor and you want to include either a pay-if-paid or a pay-when-paid clause in your subcontractor agreements, you should always consult with an attorney to ensure that the wording is very obvious, and be clear in negotiating with the subcontractor about these terms for payment.
If you are a subcontractor, it is important to always make sure you completely understand the terms of the agreement you are signing with the contractor. If you overlook a clear pay-if-paid or pay-when-paid clause, you could potentially be waiting for a very long time before you receive payment for the work you did, if at all. Subcontractors should also seek out the services of a skilled and knowledgeable construction law attorney to ensure that their interests are protected.
In either case, please contact the Florida Construction Law Group today to learn more.