The Dreaded “Pay when Paid” and “Pay if Paid” Clauses for Contractors
As a contractor, when you’ve completed your work, you would like to get paid. However, sometimes, this doesn’t happen in a timely manner because the person you contracted with informs you that they are having problems getting paid themselves and you won’t get paid until they do. They could have a legitimate reason (in some instances and depending on your contract) for not paying you — it is a called a “pay if paid” clause.
What is a “Pay if Paid” Clause?
It’s a clause that allows an upper tier contractor to transfer risk of nonpayment by its customer to lower-tier subcontractors and vendors. The clause makes it a condition precedent that the upper tier contractor receives payment before making payments to lower tiers. An example of this type of clause in a contract can be as follows: “It is specifically understood and agreed that payment is dependent, as a condition precedent, upon the construction manager receiving contract payments, including retainage, from the owner.”
This means that because the owner has not paid the person who hired you (the contractor), your final expenses for the job aren’t going to get paid until the owner coughs up the rest of the cash.
What is a “Pay when Paid” Clause?
It’ a timing clause, allowing upper tier contractor’s to postpone when it pays lower tier contractors and vendors. In theory, to allow time for upper tiers to bill and receive payment from its customer first.
Isn’t This Against The Law?
There is good news. New York’s highest court has held that “Pay if Paid” clauses are not enforceable, because they violate New York Lien Law and are deemed to be against public policy. Only New York and California have voided the “Pay if Paid” provisions and their legislature understands that the clause is against public policy. All other states do not.
What Do You Do?
The best thing to do when writing contracts for jobs is to absolutely know your contract inside and out. If there are owners higher up the chain than those who are hiring you, it is pretty much guaranteed that your final payment could be delayed for some time thanks to the “Pay when Paid” clause. Having an attorney prepare and /or review your contract can help alleviate some of these problems and help you get paid based on your schedule instead of your client’s.
Negotiate. Limit your exposure to loss. Things such as having a payment schedule due every 2 weeks opposed to monthly, getting paid faster by limiting the number of days required for upper tier to pay lower tier (to 10 days opposed to 30, for example) or reduce retainage held.
Don’t Wait Until It Is Too Late
Too often, contractors wait until the cash stops flowing to take a new look at their contract. Consulting a lawyer at this point is helpful, but it does not necessarily mean that you will be getting paid anytime soon. In fact, if the clause is in place, you may be bound and just have to wait it out.
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