UNDERSTANDING CONDITIONAL PAYMENT LANGUAGE – THE DREADED “PAY IF PAID”
By: Michael E. Stearns, Esq., Stearns, Roberts & Guttentag, LLC
Most subcontractors have had the unfortunate experience of being on the wrong side of a “take it or leave it” offer from a contractor regarding the form of a subcontract. The reality of the construction industry is that contractors often hold the cards and subcontractors may have little bargaining power at contract inception. “Sign my contract or I’ll find another plumber, electrician, mason, etc.” is a familiar refrain.
While it is always best to attempt to negotiate unfavorable contract language, the fact is that sometimes the other party won’t budge and you need to make a business decision as to whether to sign an unfavorable contract and hope the job goes smoothly. To make an informed decision you need to understand the legal effect of the document you are signing. It is best to consult an experienced construction lawyer to review proposed contracts. The money spent with attorneys on the front end is often the best use of your legal budget and can help to balance risk and put you in a better position if a dispute does occur.
One way that contractors seek to balance their risk is by the inclusion of conditional payment language in their subcontracts. These provisions are commonly referred to as “pay when paid” or “pay if paid” clauses. As a starting point, it should be noted that the law disfavors these provisions because they shift the risk of non payment to those who often can least afford to go unpaid for their work. As a result, the language used in conditional payment clauses is critical and courts will not enforce these provisions unless properly drafted.
There are generally two ways to successfully draft conditional payment provisions. The first is to use the magic legal words “condition precedent”. A condition precedent is a condition that must occur first for another action to take place. In this case, the contractor’s receipt of payment for your work is the condition that must occur before the contractor’s duty to pay you arises. Language such as, “Subcontractor agrees that Contractor’s receipt of payment from Owner for Subcontractor’s work is a condition precedent to Subcontractor’s right to payment from Contractor” is enforceable conditional payment language.
A second way to draft an enforceable conditional payment clause is to use plain English (something too often seemingly foreign to lawyers) that clearly expresses that the risk of non payment is being shifted to the subcontractor. Language such as, “Contractor has no duty to pay Subcontractor if Contractor is not paid by Owner for Subcontractor’s work and Subcontractor accepts the risk of the Owner’s non payment” is also enforceable. Though these provisions are often referred to as “pay when paid” provisions, using language that denotes timing rather than an absolute condition will is not effective. For example, language such as, “Subcontractor agrees that it will not be paid until Contractor is paid by Owner” will not protect the contractor in the event of an owner’s non payment. Courts have interpreted this type of language as addressing only the timing of payment rather than whether or not payment will be made at all and imply a reasonable time for the subcontractor to wait for payment.
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.
A potential way around an otherwise enforceable “pay if paid” clause in a subcontract can occur by virtue of the incorporation of the owner/contractor agreement into a subcontract. It is common for subcontracts to including multiple other documents by reference including the project plans and specification and the owner/contractor agreement. It is not uncommon for owners to include provisions in their agreements which require the contractor to prove that he has paid all subcontractors and suppliers prior to being entitled to receive payment from the owner. This is especially true with respect to final payment provisions but is also found in connection with progress payment provisions. These competing clauses create a conflict. On the one hand, under the subcontract, the contractor does not have to pay you unless he is paid by the owner. On the other hand, however, the contractor is not entitled to be paid by the owner until he pays you. These two clauses cannot co-exist and cancel each other out with the result being that the contractor loses the protection of the conditional payment language. 
While lienors are entitled to a copy of the owner/contractor agreement under Florida’s construction lien law, as a practical matter lienors often don’t have access to that agreement prior to entering into their subcontract. Signing a subcontract that incorporates other documents without reading those documents is no different than not reading the subcontract itself and is not recommended for obvious reasons. By agreeing to conditional payment language, you accept the risk that the owner won’t pay the contractor and give up your contractual right to payment from the contractor if that happens. 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.
About the Author Michael E. Stearns has practiced exclusively in the area of Construction Law since 1996 and was designated as a Board Certified expert in construction law by the Florida Bar in 2005, the first year this designation was available. Mr. Stearns is “AV” rated by Martindale Hubble – the highest professional peer rating for legal ability and ethical standards. He is listed among the “Best Lawyers In America”, “Florida Super Lawyers” and “South Florida’s Top Lawyers”. Mr. Stearns got his start in the construction industry working as a carpenter while attending the University of Florida’s M.E. Rinker College of Building Construction where he earned a Bachelor’s Degree in Building Construction. He has held a Florida State Certified Building Contractor’s license since 1989 and directed multi-million dollar construction projects as a project manager before attending law school and embarking on his legal career.
 It is also true that inclusion of conditional payment language in a subcontract places a duty on the contractor to seek payment on behalf of the subcontractor and that such a clause may be avoided if the contractor does not make an effort to seek payment.