Contingent payment clauses, known as Pay-if-paid provisions, are often found in contracts between general contractors and their subcontractors. These provisions can be used in construction contracts for most commercial and government projects, and even some residential projects. They are inapplicable in, among other instances, residential construction contracts for detached single family residences, duplexes, triplexes, or quadplexes, as well as in contracts with TXDOT.[i]
Pay-if-paid clauses absolve general contractors from a duty to pay their subcontractors in the event that the owner does not pay the general contractor. This shifts the risk of non-payment from the general contractor to the subcontractor. Subcontractors only get paid if the general contractor does.[ii] There are, however, a variety of exceptions to their enforceability.
Exceptions to pay-if-paid clauses:
Ambiguity: Where the language of the clause is not clear and unambiguous, it will not be enforced.[iii] To ensure enforceability, make sure that your contract contains clear language conveying that payment to subcontractor is contingent upon the condition that the general contractor receives payment from owner.
Where the language is ambiguous, there is a risk that the Court will interpret the clause as a Pay-when-paid provisions instead. Pay-when-paid clauses merely address the timing of payment. They do not absolve the general contractor from their obligation of payment in the case of non-payment, even if the general contractor is never paid by the owner. This means that the risk of non-payment is still shouldered by the general contractor, not the subcontractor. When trying to form a pay-if-paid provision, avoid using temporal language like “until”— instead use language such as “dependent upon” the general contractor receiving payment from owner or “payment by owner to general contractor is a condition precedent for payment to subcontractor”.
Example of Court finding provision to be enforceable as pay-if-paid:
“It is specifically… agreed that the payment to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving contract payments, including retainer from the owner.”[iv]
Example of Court finding provision to be pay-when-paid instead:
“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… to the general contractor.”[v]
Waiver: Where the general contractor pays the subcontractor prior to being paid themself, they may be considered to have “waived” the contractual provision.[vi]
General Contractor’s Fault: If the owner’s non-payment is due to the conduct or work of the general contractor themself, the pay-if-paid provision may not apply.[vii] This excludes instances where non-payment is due to the subcontractor or supplier’s failure to meet the requirements of their contract.
There are other exceptions to pay-if-paid clauses which may render them unenforceable, such as where the general contractor is in a sham relationship with the owner, where the provisions of the contract are unconscionable, or where the subcontractor suspends the clause.[viii][ix][x]
It is important to note that Pay-if-paid clauses are not a basis for invalidating the enforceability or perfection of a mechanic’s lien under Chapter 53 of the Texas Property Code.[xi]
As always, each case and set of circumstances are unique. It is best to speak with a lawyer to judge the enforceability of any contractual provisions that you wish to, or have already, contracted into. If you have questions regarding your construction contracts or whether a pay-if-paid provision would be right for your project, give West Mermis a call today at (713) 255-3550.
[i] Tex. Bus. & Com. Code § 56.002.
[ii] § 3:27. Payment—Contingent payment, Canterbury and Shapiro, TX Construction Law Manual § 3:27 (3d ed.)
[iii] Id. At 626.
[iv] Gilbane Bldg. Co. v. Brisk Waterproofing Co., Inc., 585 A.2d 248, 250 (Md. Spec. App. 1991) (Emphasis added) (where the contract provision used clear, conditional language).
[v] Gulf Const. Co., Inc. v. Self, 676 S.W.2d 624, 627 (Tex. App.—Corpus Christi 1984), writ refused n.r.e., (Mar. 20, 1985) (Emphasis added) (where the contract language used temporal language).
[vi] STR Constructors, Ltd. v. Newman Tile, Inc., 395 S.W.3d 383, 291 Ed. Law Rep. 895 (Tex. App.—El Paso 2013).
[vii] Tex. Bus. & Com. Code § 56.051.
[viii] Tex. Prop. Code § 53.026.
[ix] Tex. Bus. & Com. Code § 56.054.
[x] Tex. Bus. & Com. Code § 56.052(e).
[xi] Tex. Bus. & Com. Code § 56.055.
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