In our previous blog article, we learned about the two types of contingent payment clauses, the pay-if-paid and pay-when-paid clauses. In this blog article, we will discuss the ways to fight each type of clause if you should find that you have already executed a contract containing one of these types of clauses. As previously discussed, the pay-if-paid clause is the most risky to the subcontractor. Subcontractors should try to negotiate the removal of the pay-if-paid clause or at least a change in the wording to make it a pay-when-paid clause.
Statutes in the Texas Business and Commerce Code prohibit the enforcement of contingent payment clauses in the following situations:
Certain Contractual Obligations Not Met
A general contractor may not enforce a contingent payment clause because of activities of the contractor not meeting its contractual obligations unless the subcontractor is the reason the obligations were not met.
After Written Notice of Objection from the Subcontractor
A general contractor may not enforce a contingent payment clause as to work performed or materials delivered after receiving written notice from you objecting to further enforceability of the contingent payment clause. In other words, a subcontractor may send a written notice to the general contractor forty-five (45) days after the date the subcontractor has submitted a written request for payment in the form called for in the contract documents.
This written notice of objection does not prevent enforcement, however, if the subcontractor fails to meet its contractual obligations, the contractor responds timely to the notice in writing informing the subcontractor that its notice does not prevent enforcement of the contingent payment clause under Tex. Bus. & Com. Code Ann. §56.052(c), or the contingent payor’s successful assertion of a defense of sovereign immunity.
A general contractor may not enforce a contingent payment clause if it is in a sham relationship with the owner as described in Section 53.026 of the Texas Property Code.
A general contractor may not enforce a contingent payment clause if enforcement would be unconscionable. The party asserting the unconscionably has the burden of proving that the clause is unconscionable. The enforcement of the clause is not unconscionable if the general contractor:
- Proves that it has exercised diligence in communicating to the subcontractor in writing the financial viability of the owner and the existence of adequate financial arrangements to pay for the improvements.
- Made reasonable efforts to collect the amount owed to the general contractor or made or offered to make an assignment by the general contractor a cause of action by the obligor for the amounts owed to the subcontractor and offered reasonable cooperation to the subcontractor’s collection efforts.
A contractor will have exercised diligence if they provide to the subcontractor in writing the following information: (1) the name, address and business number of the project owner; (2) the legal description of the property; (3) The name of the surety on any payment bond; (4) information regarding a loan obtained for the project; (5) a statement furnished by the project owner of any funds that could pay the balance of the project if no loan was taken or the loan amount was insufficient.
The following are some additional items from the statutes regarding contingent payment clauses:
- A contingent payment clause may not be used as a basis for the invalidation of the enforceability or perfection of a mechanic’s lien under Chapter 53 of the Texas Property Code.
- The assertion of a contingent payment clause is an affirmative defense to a civil action for payment under a contract.
- An obligor may not prohibit a general contractor from allocating risk by means of a contingent payment clause.
The contingent payment clause statutes can be very difficult to navigate without the help of an attorney, especially considering the impact not receiving payment can have on your company. The Cromeens Law Firm can help make sure that you understand the contingent fee contract clauses that can directly affect your ability to receive payment at the end of your hard work.