General contractors rely on others to complete their work on behalf of an owner, including masons, electricians, iron workers and countless suppliers of wood, steel and equipment. Payment by an owner to the general contractor then cascades like a waterfall to all who have put labor and materials into the project.
A derivation of this clause says the sub-contractor or supplier will get paid if, and only if, the owner pays the general contractor. The "pay-if-paid" clause is a draconian provision (Draco was an ancient Greek politician who advocated that the most minor of infractions warranted the harshest punishment, usually death). A small contractor that does a superlative job can go out of business if payment disputes among the general contractor and the owner do not resolve. It is not hard to imagine smaller or marginally capitalized contractor having to withhold payroll for employees, miss loan payments, or simply go fishing.
Where our Nation's economic recovery is thin, it is even more important for a sub-contractor to avoid the uncertainty of "pay-if-paid." Some jobs are simply not worth that risk.
Do you know what's in your contract documents?
Except when it doesn't.
General contractors routinely include one of two types of payment provisions in contracts with sub-contractors and suppliers. The first is commonly called "pay-when-paid," and the second is called "pay-if-paid." Both clauses alter the traditional situation where a sub-contractor or materialman is entitled to immediate payment for delivery of work or product.
On May 24, 2018 Maryland's highest appellate court decided Young Electrical Contractors v. Dustin Construction, which provides an excellent summary of the difference between the two provisions.
During the latter half of the twentieth century, general contractors began to include contingent payment provisions in their subcontracts. Although there apparently was no standard language, such a clause would typically provide that the general contractor was not obligated to pay the subcontractor until some specified number of days after the general contractor received payment under the prime contract from the owner of the project. Thus, for example, a window distributor that entered into a subcontract to supply windows for a project would not necessarily receive payment upon delivery of the windows, but would be required to await payment of the general contractor by the owner of the projectAs is explained by the Court of Appeals, this "pay-when-paid" provision does not excuse the obligation to pay a sub-contractor, only the timing of the payment. And so a sub-contractor that has completed all its contract requirements might have to wait some time to receive payment. In the real world, extended delays put real companies and real employees out of work. This type of provision forces sub-contractors and suppliers to finance a project, to a certain extent.
A derivation of this clause says the sub-contractor or supplier will get paid if, and only if, the owner pays the general contractor. The "pay-if-paid" clause is a draconian provision (Draco was an ancient Greek politician who advocated that the most minor of infractions warranted the harshest punishment, usually death). A small contractor that does a superlative job can go out of business if payment disputes among the general contractor and the owner do not resolve. It is not hard to imagine smaller or marginally capitalized contractor having to withhold payroll for employees, miss loan payments, or simply go fishing.
Where our Nation's economic recovery is thin, it is even more important for a sub-contractor to avoid the uncertainty of "pay-if-paid." Some jobs are simply not worth that risk.
Do you know what's in your contract documents?
