When are contractors required to pay their subcontractors? While this sounds like a simple question, determining the answer in any particular case can present unexpected challenges, and the timing of contractors’ payment obligations is a frequent issue in construction contract litigation.
“Pay-If-Paid” vs. “Pay-When-Paid”
In many cases, the issue arises out of the parties’ disagreement over whether their agreement’s payment clause is a “pay-if-paid” or a “pay-when-paid” provision. With a “pay-if-paid” provision, the general contractor is not under an obligation to pay unless and until it receives payment from the property owner (assuming the provision is properly drafted and legally enforceable). If the contractor does not get paid, then neither does the subcontractor—the entire payment risk rests with the subcontractor. This is typically reflected in contract language stating that payment from the property owner is a “condition precedent” to payment of the subcontractor, and an acknowledgement that the subcontractor is not relying on the contractor’s credit for payment.
By contrast, when a construction contract includes a “pay-when-paid” clause, the risk of non-payment ultimately shifts to the contractor. These clauses typically state that the subcontractor must be paid within a specific timeframe after payment from the property owner, or within an alternate timeframe if no such payment is received. This type of provision is clearly much more favorable to the subcontractor, although pay-when-paid clauses (or questions about whether a contract establishes pay-if-paid or pay-when-paid liability) also have a greater tendency to lead to litigation.
Related Issues in Contractor-Subcontractor Litigation
When analyzing contractors’ payment obligations and subcontractors’ payment rights, the parties will typically have a number of other issues to contend with as well. For example, in a typical contractor-subcontractor payment dispute, some of the key questions will include:
- Does the payment clause contain a hybrid of pay-if-paid and pay-when-paid language? If so, what does this mean for the parties’ dispute?
- If the parties’ contract has a pay-when-paid clause, when is the subcontractor entitled to seek payment from an unpaid general contractor?
- Has the subcontractor satisfactorily performed under the contract? Or, is the contractor within its rights to withhold payment regardless of whether the agreement contains a pay-if-paid or pay-when-paid provision?
- Is the property owner within its rights to withhold payment from the contractor? If so, what does this mean for the subcontractor?
- If the property owner is improperly withholding payment, what remedies does the subcontractor have available? Can it take legal action against the property owner directly? Does it have the contractual authority to compel legal action by the contractor?
Contact the Fort Lauderdale Construction Lawyers at Michael L. Feinstein, P.A.
As you can see, the issues in contractor-subcontractor payment disputes can quickly generate complex disputes with high stakes for all parties involved. At Michael L. Feinstein, P.A., we have extensive experience resolving construction contract disputes through negotiations, alternative dispute resolution (ADR) proceedings, and state and federal litigation. If you are facing a potential dispute and would like to speak with an attorney at our offices in Fort Lauderdale, please call (954) 767-9662 or contact us online today.