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There are a lot of reasons why

getting paid is tough in your industry

America believes that trade contractors and suppliers

should get paid

America believes that GCs and Developers Should Burden a

Project’s Financial Risk

Mechanics lien laws provide contractors remedy in event of non-payment

Contracts start to include “no lien clauses.” Courts void these provisions as anti-public policy

Contracts start to include “pay when paid” clauses. Courts say this is only a “timing” clause

“Pay when paid” turns into “pay if paid.” Many courts declaring this void as against public policy.

Notice Claim Provisions now appearing in contracts with strict claim periods.

1791 40’s 60’s 80’s 2000

Mechanics Lien Rights !Payment bond requirements !Contractor license bonds (i.e. WA) !Misappropriation of funds laws and criminal statutes !Contractor payment timing laws

Laws Protecting Subcontractors & Suppliers

Mechanics Lien Rights !Payment bond requirements !Contractor license bonds (i.e. WA) !Misappropriation of funds laws and criminal statutes !Contractor payment timing laws

Laws Protecting Subcontractors & Suppliers

No Lien Clauses !Pay When Paid Clause !Pay If Paid Clause !Notice Claim Provisions !Retainage Requirements

Owners / GCs Attempt To Shift Risk With Contract

Mechanics Lien Rights !Payment bond requirements !Contractor license bonds (i.e. WA) !Misappropriation of funds laws and criminal statutes !Contractor payment timing laws

Laws Protecting Subcontractors & Suppliers

No Lien Clauses !Pay When Paid Clause !Pay If Paid Clause !Notice Claim Provisions !Retainage Requirements

Owners / GCs Attempt To Shift Risk With Contract

Judges (usually) tip the scales back to subs & suppliers

Pay When Paid Clauses Begin to Appear in Contracts in the ‘60sThis was a move by GC’s and Property Owners to attempt to shift the financial risk to subs. This continued the battle between two deeply rooted American interests:

1. mechanics lien rights (the desire for people to get paid for the work they do); &2. freedom of contract (the desire to let parties decide for themselves).

These provisions were generally interpreted by the courts as a “timing mechanism”!

That is, they allowed the GCs to wait for a “reasonable period of time” to receive payment before they were obligated to pay the subs - BUT they were not absolved of that responsibility altogether.

But…THEY STILL HAD TO PAY

GCs and Owners didn’t take that lying down, so Pay When Paid

became Pay IF Paid.

Many states responded to this new provision by declaring Pay If Paid Clauses Void As

“Against Public Policy”The desire for parties lower on the ladder to get paid what they have earned is strong. The following states (in green) have “outlawed” Pay If Paid clauses:

And, in most of the remaining states - Pay If Paid clauses are looked upon with disfavor by courts, and require technically precise language in order to be effective.

This wording is generally required to be specific, and unambiguous.

This means including language like: !

“condition precedent to payment” or “explicitly agrees that this provision is meant to shift the risk of non-payment”

So, What Does This Really Mean?I have great news for general contractors: the old adage that possession is 9/10ths of the law is true. If you hold the money, you have a lot of leverage.

3 Points For General Contractors:• Don’t be greedy.  If you hold the money you have a lot of leverage, but that

leverage can easily flip in favor of the subcontractors if you abuse it. If the state law clearly interprets pay-if-paid clauses as invalid, start thinking about how you can pay the subcontractor.

• Don’t Try To Make Law:  If you are in a state that doesn’t have clear law about your contract provision, it’s probably a bad idea to be the company to make the law.

• If You’re Right, You’re Right: Pay-if-paid clauses are not dead. There are many jurisdictions that will entertain them. Beware of a state reversing course for policy reasons (see, for example, recent Ohio decision), but feel free to stick to your guns and require the subcontractor to wait...forever, if needed...if you have the contract provision and the accompanying law to protect you.  However, do not foreclose on the idea that a settlement with the subcontractor may be a fiscal and frustration-responsible option.

Now I have great news for subcontractors: You have good odds of eventually beating the general contractor.  It just may be very, very expensive.

So, What Does This Really Mean?

2 Points for Subs:• Pay-If-Paid Clauses Are Strictly Construed In Your Favor:  Usually, this

means that they will be pretty benign and allow you to collect even if the general contractor is never paid.

• Don’t Get Greedy:  The GCs were warned to not get greedy by relying too much on their pay-if-paid clause, which may eventually be overturned. Similarly, subcontractors should not get greedy and try to shoot for the moon in damages if the general contractor abused the contract a bit by holding the money for too long. Indeed, many state laws will award subcontractors damages and penalties if a GC misbehaves, but getting into this fight is probably going to be more difficult than you or your lawyers predict.

How Will Your State Interpret It?

50 STATE GUIDE To Pay When Paid & Pay If Paid Clauses

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