PAY IF PAID / PAY WHEN PAID
Provisions
in a subcontract that make payment of the subcontractor contingent on payment
to the General, pay if paid, are void. If your contract provides that the sub gets paid if
and only if you get paid, it is not enforceable. Pay if paid clauses are void
as a matter of law. Don’t include this type of provision in your contracts.
Pay when paid clauses are slightly different and might be valid, but they need to be worded so that the subcontractor’s lien rights are not infringed. A requirement that the sub wait a reasonable time for payment is OK. Language providing that the obligation to pay the sub arises at the time the payment application is submitted but the time to actually pay the sub arises when the General receives payment may also be valid.
These provisions are tricky, and it is not really clear when and under what circumstances the pay when paid clause is valid. If you use the reasonable time period language, make sure you define it in some manner so that it is conditioned on an event that will occur; i.e. the conclusion of any dispute with an Owner, 90 days after the application is submitted, the occupancy of the project, etc.
Note: Any pay when paid provision cannot interfere with the subcontractor’s Mechanic Lien rights. If the provision does, and if the subcontractor is unable to record a Mechanic Lien because the payment procedure requires that it wait for payment, then that provision is going to be void. The subcontractor will always be allowed to record its Mechanic Lien, provided it is entitled to in the first place, and any provision that would prevent that right is not enforceable.
Pay when paid clauses are slightly different and might be valid, but they need to be worded so that the subcontractor’s lien rights are not infringed. A requirement that the sub wait a reasonable time for payment is OK. Language providing that the obligation to pay the sub arises at the time the payment application is submitted but the time to actually pay the sub arises when the General receives payment may also be valid.
These provisions are tricky, and it is not really clear when and under what circumstances the pay when paid clause is valid. If you use the reasonable time period language, make sure you define it in some manner so that it is conditioned on an event that will occur; i.e. the conclusion of any dispute with an Owner, 90 days after the application is submitted, the occupancy of the project, etc.
Note: Any pay when paid provision cannot interfere with the subcontractor’s Mechanic Lien rights. If the provision does, and if the subcontractor is unable to record a Mechanic Lien because the payment procedure requires that it wait for payment, then that provision is going to be void. The subcontractor will always be allowed to record its Mechanic Lien, provided it is entitled to in the first place, and any provision that would prevent that right is not enforceable.