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Sep 22

Dealing with “Pay If Paid” Clauses

TBoYB1Dealing with “Pay If Paid” Clauses

When I first heard of this provision I thought how ridiculously unfair. Sub-contractors and material suppliers are the least able to take the hit of non-payment.

I also thought there was no way that they would stand for it.  I still feel the same way on the first count, but have been surprised by the willingness of sub-contractors to agree to it.

If every single contract that had this provision included was returned un-signed with a post it that said “are you crazy? There is no way we will sign this!” the idea would have quickly died.  But in our highly competitive industries, companies are just too desperate to turn down work. Realizing that a united front against this injustice is unrealistic I have spent a little time researching the effectiveness of this clause.

I have learned that overall the law is not in favor of these provisions.  Also, that agreeing to this provision does not, necessarily, impact your your lien rights.  Here are some links to useful information to store away in case you are in the unfortunate position to fight for your money.

There is a difference between “Pay If Paid” and “Pay When Paid”.

In Minnesota, a “pay-if-paid” provision must expressly and unequivocally state that the risk of owner insolvency is being shifted to the subcontractor for this provision to be enforceable.  Otherwise, the provision will be treated like a “pay-when-paid” provision, focusing on timing of payment and not shifting the risk of payment.

“By Far The Best Thing You Can Do Is Perfect Your Construction Lien of Bond Rights”

So what can you do to protect yourself if you make the decision to enter into a contract with enforceable conditional payment language? By far the best thing that you can do is to perfect your construction lien or bond rights. Conditional payment language in a subcontract is not a defense that is available to an owner in a lien foreclosure action. Likewise, unless a “conditional payment bond” is utilized, the contractor’s surety is not entitled to the benefit of conditional payment language in a subcontract and your bond claim can proceed whether or not the contractor has been paid. Conditional payment bonds are not available on public construction projects and are seldom used on private construction project. Where they are used on private projects, you have the right to record a lien to the extent that the contractor has not been paid for your work and the right to assert a claim against the bond to the extent that the contractor has been paid for your work.

By perfecting your lien or bond rights, you establish an alternative right to payment from the owner’s property or the contractor’s surety that is not dependent on the owner paying the contractor.

“Pay If Paid” Clauses Are Not Enforceable in All States”

Pay if paid clauses are not enforceable in all states because they may be considered waivers of the contractor’s lien rights. There is a growing legislative and judicial trend finding “pay if paid” provisions against public policy and unenforceable. In those states, contractors must pay subcontractors within a reasonable period of time for their work.

I hope you never have use of the above information!  Have a prosperous week!

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