In many construction contracts, the general contractor or the owner will often insert a “Paid When Paid” provision within the Contract which dictates when payment will be due to the general contractor or subcontractor. In the past, the Court’s had construed many of these “Paid When Paid” provisions as only controlling the timing of the payment to be made pursuant to the contract and not an absolute bar to payment being tendered.
Recently, however, the Court’s have begun to strictly enforce the “Paid When Paid” provisions provided they are clearly worded and all parties had prior notice of the provision. In general, the Court has stated that where the condition precedent of upstream payment prior to payments being tendered to the subcontractor or contractor was clear and unambiguous and there is no room for interpretation, the Court must strictly construe the “Paid When Paid” provision of the contract. In order to properly fashion one of these clauses, it should be clear and the terms should be clearly worded that the “Paid When Paid” provision is not to be construed as a time of payment clause, but instead, as a condition precedent which must be satisfied before a contractor is entitled to payment pursuant to the terms of the agreement.
It is likewise advisable to include language that the subcontractor understands and agrees that it assumes the risk of non-payment by the owner for work and materials for which the subcontractor seeks payment. In the absence of clear and unambiguous language that the subcontractor would never be entitled to payment under any circumstances unless and until funds are received by the general contractor, it is probable that the Court would construe the “Paid When Paid” provision against the general contractor and find it to be only a timing of the payment clause. In such an event, the general contractor would have to pay the subcontractor even if was not directly paid by the owner.
As such, if you are a subcontractor you should carefully review the “Paid When Paid” provision to determine whether payment from the owner to the general contractor is an absolute condition precedent prior to you being entitled to payment. If this is the case, you can either attempt to renegotiate the clause, or you can understand that you are taking a risk in receiving payment. On the other hand, if you are the general contractor, it behooves you to carefully draft a “Paid When Paid” provision which might protect you from payment to subcontractors should you not be paid by the owner. The wording of these clauses can be somewhat technical, and therefore, it is suggested that you seek the advice of an attorney.