Validity of “Pay When Paid” Provision

construction-contract-payment-provisions“Pay When Paid” provisions are increasingly common in the Colorado construction industry. Subcontractors have become used to seeing these clauses added to their contracts and typically sign them, even if they are reluctant to do so, because otherwise they wouldn’t get the job.

The trouble with “Pay When Paid” clauses is that they shift the burden of non-payment to the subcontractor. This has led to questions about the validity of the clauses.

“Pay When Paid” Vs. “Pay If Paid”

There are two common clauses in Colorado construction contracts. “Pay If Paid” and “Pay When Paid” provisions are considered contingent payment clauses. Payment is contingent upon something else happening – in this case, payment is contingent on the general contractor getting paid first.

Both clauses provide protections for the general contractor at the expense of the sub. These clauses mean that the general does not have to pay the sub unless (“Pay If Paid”) or until (“Pay When Paid”) the client pays the general contractor. As a result, subcontractors must wait to get paid until the general contractor is paid, even if their portion of the work is already complete. Subs cannot approach the homeowner/client directly for payment; they must receive it through the general contractor, which severely limits their ability to collect.

  • “Pay When Paid”. Under “Pay When Paid” provisions, the general contractor’s obligation to pay subs is subject to the express condition of payment by the homeowner/client. This clause has pros and cons to both the general and subcontractors. For instance, if the general contractor is paid but then fails to pay the sub, the general contractor can be held liable for interest and the sub’s attorneys’ fees. This risk helps ensure subs are paid promptly.But, it works to protect the general contractor too since they cannot be forced to pay the sub unless they have already received payment from the client. In these cases, the clauses create a strong defense for general contractors who find themselves facing lawsuits from subs who have not received payment.
  • “Pay If Paid”. These clauses are more risky to the subcontractor since they require that the owner pay the contractor before the sub receives payment. Under these clauses, the general contractor may never be required to pay the sub if the owner does not provide payment.

The Validity of “Pay When Paid” Clauses

There isn’t one uniform nationwide decision about the validity of these clauses. Some state courts have ruled that they are valid, others have ruled that they are not. Colorado is one of the states that has ruled that both clauses are valid and that they shift risk to the subcontractor.

The validity of the clause under Colorado law comes down to the specific wording used in the contract.

  • “Pay If Paid” clauses are valid if they explicitly state that the subcontractor will be paid only if the general contractor is first paid by the owner. The clause must also make clear the fact that the subcontractor bears the risk of the owner’s nonpayment.
  • “Pay When Paid” clauses are viewed differently. These clauses are seen as a promise of payment by the general to the sub, even if the homeowner/client does not pay. These clauses, then, become more a question of timing, than a question of payment vs. non-payment. Courts have held that contractors cannot withhold payment under a “Pay When Paid” clause indefinitely. These clauses require the contractor to pay the sub within a reasonable timeframe upon project completion.

Contact Schlueter, Mahoney & Ross, P.C. For Legal Guidance On Contingent Clauses

Since Colorado courts have deemed them valid, “Pay When Paid” and “Pay If Paid” clauses aren’t going away anytime soon. The most important point of these clauses is that you know and understand the provisions of the contract you are signing. Legal guidance can be invaluable in these situations and can protect subcontractors from the risks of non-payment. It may be possible to negotiate changing a “Pay If Paid” clause to a “Pay When Paid” clause, which offers a better guarantee of payment for the sub.

If you have been presented with a contract that contains a continent payment clause and you need legal advice, or if you find yourself in a position of non-payment, contact a construction law attorney at Schlueter, Mahoney & Ross, P.C. Our construction attorneys can be reached by phone at (303) 292-4525, at our office, or by filling out the contact form on our Contact Us page.

Our construction law attorneys, Michael A. Schlueter and Elliot D. Fladen represent clients throughout Colorado, including Denver, Aurora, Broomfield, Boulder, Greely, Commerce City, Lakewood, Highlands Ranch, Littleton, Arvada, Westminster, Pueblo, Thornton, Colorado Springs, and Fort Collins.

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