Construction contracts include complicated rules about when and how subcontractors receive payment. One rule, called the “pay-if-paid” clause, requires subcontractors to wait until the contractor gets paid by the project owner. This creates risks for subcontractors. Understanding whether courts enforce these clauses helps subcontractors avoid payment issues.
What is a pay-if-paid clause?
A pay-if-paid clause states that a contractor pays a subcontractor only after the contractor receives payment from the project owner. This shifts the risk of nonpayment onto the subcontractor. If the owner fails to pay, the subcontractor may not receive compensation for completed work. These clauses remain controversial and are illegal in some jurisdictions.
How do courts view pay-if-paid clauses?
Texas courts enforce pay-if-paid clauses if the contract language clearly states that payment to the subcontractor depends on the contractor receiving payment from the project owner. Texas law requires these clauses to be explicit and unambiguous for enforcement. However, subcontractors can challenge these clauses if they believe the terms are unfairly burdensome or if the language lacks clarity.
What can subcontractors do to protect themselves?
Subcontractors should carefully review contracts to identify pay-if-paid clauses. Consulting a lawyer helps subcontractors understand the risks and negotiate better terms. Subcontractors may prefer a “pay-when-paid” clause, which requires contractors to pay them within a reasonable time, regardless of whether the owner has paid.
Pay-if-paid clauses create significant financial risks for subcontractors, especially on projects with tight budgets. Subcontractors must stay vigilant when reviewing contracts and addressing these clauses to secure timely payments. Taking these steps ensures better financial stability and avoids potential construction law disputes.