One of the most important provisions in any construction contract, or any contract for that matter, is the payment provision. Before signing the contract, parties must understand how and when they get paid and, in turn, when they are required to make payment. One way parties, particularly contractors, attempt to handle payment uncertainties is to include contingent payment provisions or time of payment provisions in their construction contracts. These provisions are commonly referred to as pay-if-paid and pay-when-paid provisions and are enforceable in Florida. While these provisions sound the same, they operate very differently and, as such, may have unintended consequences for the parties.
In a construction subcontract, a pay-if-paid provision requires payment from the owner before the contractor is required to pay its subcontractors. Contractors employ this provision to shift the risk of non-payment by the owner to the subcontractor. In other words, if the owner does not pay the contractor, then a valid pay-if-paid provision does not require the contractor to pay its subcontractor, unless and until the owner pays the contractor. While a pay-if-paid provision is unenforceable in Florida, it must clearly and unambiguously communicate the intention to shift the risk of payment to the payee. Snead Construction Corp. v. Langerman, 369 So. 2d 591 (Fla. 1st DCA 1978). The policy reason requiring clarity in such provisions is that most subcontractors would not agree to such a payment contingency. As such, if the pay-if-paid provision falls short of communicating this condition precedent to payment, it will be construed as requiring payment within a reasonable period of time, rather than shifting the burden of the owner’s non-payment on the subcontractor. Sharp v. Machry, 488 So. 2d 133 (Fla. 2nd DCA 1986); G.E.L. Recycling, Inc. v. Atlantic Environmental, Inc., 821 So. 2d 431 (Fla. 5th DCA 2002); Peacock Construction Co., Inc. v. Modern Air Conditioning, Inc., 353 So. 2d 840 (Fla. 1977). If the pay-if-paid provision is properly drafted, the contractor’s payment obligation to its subcontractor does not materialize unless and until the condition precedent (payment from the owner) is met.
Another type of payment provision is a pay-when-paid provision. This type of payment provision requires payment by the contractor to the subcontractor within a reasonable time, even if the contractor has not been paid by the owner. These types of provisions are considered an absolute promise to pay that simply postpones payment for a reasonable time after completion of the subcontractor’s work and request for payment. A pay-when-paid provision, therefore, does little to shift risk in the event of non-payment by the owner.
General contractors attempting to include pay-if-paid provisions in their subcontracts should consult counsel to ensure the provision is clear and unambiguous. Otherwise, the “pay-if-paid” provision will not have its intended risk-shifting effect and will likely be construed as requiring payment within a reasonable period of time. Importantly, the burden of clearly expressing the condition precedent of a pay-if-paid provision lies with the contractor or the party attempting to enforce the provision.
Subcontractors must carefully read all of the payment terms of their subcontract to understand how and when they will be paid. A valid and enforceable pay-if-paid provision poses significant risk to a subcontractor. If possible, a subcontractor should attempt to strike the pay-if-paid provision and, at a minimum, replace it with a pay-when-paid provision.