Pay When Paid Clauses
There is a growing trend among contractors to shift the risk of the owner not paying to the subcontractor. This is done by inserting a pay when paid clause into the subcontract.
A good example of a pay when paid clause which was upheld by the Court is:
“Payments will be made not more than thirty (30) days after the submission date or ten
(10) days after the certification or when we have been paid by the owner, whichever is later.”
This clause really means: “If I do not get paid then you do not get paid”.
If that happens, the subcontractor did the work for free and will have to use its own resources to pay its trades and suppliers or go broke.
This type of clause is usually missed by the subcontractor in a rush to sign the subcontract to get the work started. It is very unfair. The subcontractor has no idea about the ability of the owner to pay the contractor. What is the incentive for the contractor to aggressively push the owner for payment?
Can the owner and contractor manipulate a “settlement” so that no money is actually paid to the contractor? Is the subcontractor able to pursue a claim under a Labour and Material Payment Bond? After all, the money is not owing. The bonding company can oppose the subcontractor’s claim for payment under the bond by using the contractor’s “pay when paid” defence.
Courts recognize that these clauses are unfair, but have struggled with not enforcing them when there is clear and precise language in the subcontract. In these circumstances, Courts have upheld the parties’ right to contract by strictly interpreting construction contracts. An unfair deal is still a deal. However, it must be obvious to the subcontractor that it is assuming the risk of not getting paid at all.
Where the clause is unclear or ambiguous the courts have interpreted these clauses in a way that still requires the contractor to pay the subcontractor at some point.
Furthermore, these Courts have inserted into the contract an obligation on the contractor to pay its subcontractor within a reasonable period of time regardless of whether or not the owner pays the contractor. That being said, you should not rely on the Courts to interpret the contract in this way. This depends on specific judge’s interpretation and can only be done in limited circumstances.
Review your contracts carefully for a pay when paid clause. Get rid of it and keep the risk of non-payment by the owner onto the contractor where it belongs.