Dec 08 2015

Is a “Pay-When-Paid” Provision in a Construction Contract Enforceable?

By: A. Starkey De Soto

“I can’t pay you until I first get paid by the owner.”  This phrase, or something similar, is used too often in construction projects in South Florida, throughout Broward, Miami-Dade, and Palm Beach Counties, by general contractors seeking to avoid payment to a subcontractor before the general contractor has received payment from the project owner for work completed by the subcontractor.  Often, the general contractor will point out a clause or provision in the subcontract and claim it has the right to refuse payment to the subcontractor until it receives payment from the owner.  This type of subcontract clause is known as a “pay-when-paid” provision or “contingent payment” clause.

Under Florida law, “pay-when-paid” provisions are not always enforceable.  This is because Florida courts recognize that many subcontractors must receive payment for their work within a timely manner in order to remain in business. Simply put, the subcontractor has a direct contract with the general contractor, Close - up construction contract with pen and architectural rollnot with the project owner, and when the subcontractor performs work at the project, the subcontractor deserves to be paid for that work.  So, in circumstances where the project owner fails to pay the general contractor, the general contractor is often still required to pay the subcontractor.

In order for a “pay-when-paid” provision to be enforceable, and to effectively transfer the risk of the project owner’s nonpayment from the general contractor to the subcontractor, the subcontract terms must be absolutely clear that the subcontractor fully accepts the risk that the owner may not pay the general contractor, and understands that the subcontractor will be paid for its work only after the general contractor is paid.  Unless the subcontract terms and provisions are absolutely clear that payment to the general contractor by the owner is a condition to payment for work performed under the subcontract, the “pay-when-paid” provision is likely not enforceable.

If you are a contractor in South Florida (Broward, Miami-Dade, or Palm Beach), and you are wondering whether a “pay-when-paid” clause in a subcontract is enforceable under Florida law, please call our law firm in Fort Lauderdale at (954) 764-6766 to schedule a consultation with a Broward County construction lawyer.

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