One of the essential sections of any subcontract is the section containing the payment terms; after all, we all want to get paid, right? Payment terms, and the contingent payment clause specifically, is an area where we commonly see subcontractors get taken advantage of. Often, general contractors rely on these payment terms to protect themselves and withhold and/or stall making payments to the subcontractors.
As a subcontractor, you need to read the payment section of your contract carefully before signing to ensure the payment terms are not stated in a way that will cause you and your business harm. But what if you are not aware of what the payment terms listed mean? In this blog, we will explain two types of contingent payment clauses that you need to look out for.
The two main contingent payment terms are:
Pay-if-Paid
This contingent payment term usually means that payment to the subcontractor is contingent on the general contractor’s receipt of payment from the owner. Meaning if the GC doesn’t get paid, you don’t get paid. This term is the most dangerous to the subcontractor because if it is found to be enforceable, the risk of non-payment is placed directly on the subcontractor. The GC is relieved of the obligation to pay the subcontractor if they have not received payment from the owner. While pay-if-paid clauses are enforceable in Texas, courts will look for a reason to invalidate these clauses and the contract must contain very specific language to uphold a pay-if-paid clause.
Pay-when-Paid
What’s the difference between pay-if-paid vs. pay-when-paid? This contingent payment term usually contains language that allows the general contractor to withhold payment to subcontractors until they have received payment from the owner. While the pay-when-paid clause is not as dangerous to the subcontractor as the pay-if-paid clause, it could still affect the timing of payment from the general contractor to the subcontractor. This clause is more common than the pay-if-paid clause discussed above.
These two clauses can be especially dangerous, especially for small subcontractors who depend on prompt payment to keep their business running. Often smaller or newer, subcontractors are the ones who feel like they have very little leverage against the general contractors or owners in fear they will lose the job.
Examples of Contingent Payment Clauses
Are you having trouble spotting a contingent payment clause in your subcontract? We discussed the two types of contingent payment clauses in our last blog, but that legal language can be tricky and hard to understand. Contingent payment clauses are so complex that even some attorneys and courts have difficulty determining what the legislature’s intended purpose was for the statutes. To help you spot a contingent payment clause in your subcontract, we are going to go over some real examples below.
The following is an example of a pay-when-paid contingent payment clause:
The contractor shall pay the subcontractor each progress payment no later than seven working days after the contractor receives payment from the owner.
The following is an example of a pay-if-paid contingent payment clause that was found to be enforceable:
Condition Precedent to Payment by Owner to FaulknerUSA for the Subcontract Work is a condition precedent to Subcontractor’s payment by FaulknerUSA. Subcontractor is entitled to payment only for that portion of the Subcontract Work for which FaulknerUSA has been paid by Owner. Subcontractor expressly assumes the risk of nonpayment by Owner. The Subcontract Amount includes compensation to Subcontractor for the assumption of this risk. This provision establishes a condition precedent, and it shall not be construed merely as a Time of Payment Clause.[1]
The following clause, however, was not found to be an enforceable pay-if-paid clause:
“Ninth. When the owner or his representative advances or pays the general contractor, the general contractor shall be liable for and obligated to pay the sub-contractor up to the amount or percentage recognized and approved for payment by the owner’s representative less the retainage required under the terms of the prime contract. Under no circumstances shall the general contractor be obligated or required to advance or make payments to the sub-contractor until the funds have been advanced or paid by the owner or his representative to the general contractor.”[2]
Although the contingent payment statutes were initially intended to protect subcontractors from not being paid, contingent payment clauses are now gaining in popularity to accomplish the exact opposite. The key for subcontractors is to understand what contingent payment clauses look like before signing the subcontract so that you can review with an attorney and protect yourself from these dangerous clauses.
Courts hesitate to enforce a pay-if-paid clause if it leads to a complete forfeiture by a subcontractor. The courts are not out to get you, and they do not want to find that a subcontractor has been a victim of a valid pay-if-paid clause. Still, general contractors are getting better at including the “magic language” necessary to make these clauses valid.
Because these clauses can greatly affect the receipt of the subcontractor’s payment, we advise subcontractors to become familiar with these types of clauses so that you can negotiate the removal of these clauses, or at the very least, suggest language to turn a pay-if-paid clause into a pay-when-paid clause. Speak with an attorney at our firm today so that we can guide you through these negotiations and help ensure that you do not become the victim of a contingent payment clause.
[1] FaulknerUSA, LP v. Alaron Supply Co., 322 S.W.3d 357, 358 (Tex.App.—El Paso, 2010, no pet.)
[2] Gulf Const. Co. v. Self, 676 S.W.2d 624, 627 (Tex.App.—Corpus Christi, 1984), writ ref’d n.r.e.).