Contingent Payment Clauses in Florida Construction Law
Construction contracts typically have contingent payment clauses that state that a contractor will pay their subcontractors once the contractor has been paid by the property owner. These construction contract clauses shift the risk associated with payment so that the risk is shared between the contractor and all of its subcontractors.
Based on a precedent set by DEC Electric, Inc. v. Raphael Constr. Corp., 558 So. 2d 427, 429 (Fla. 1990), there are typically two ways to interpret a contingent payment clause in construction law. If the clause is clearly stated, then it is interpreted as “pay-if-paid” defined in the decision as “a condition precedent to the general contractor’s obligation to pay”. If the clause is less clear or in any way ambiguous, it can be interpreted as “pay-when-paid”. Pay-when-paid is not necessarily defined as getting paid when the contractor gets paid. Instead it is seen as setting a reasonable time for the general contractor to pay once billed. Therefore, the burden of expressing a clear and unambiguous contingent payment clause falls on the general contractor rather than on the subcontractors.
Contingent Payment: What pay if paid explicitly means
A “pay if paid” clause makes the owner paying the general contractor a condition precedent to the subcontractors getting paid. The implications are black and white: the general contractor doesn’t get paid, then it is in no way obliged to make any payments to the subcontractors. Subcontractors therefore bear the risk because if the owner never pays the contractor, the subcontractors can expect never to be paid. Also, in a pay if paid scenario there is little legal recourse for the subcontractors to ever get paid unless the contractor is first paid.
In other words, a pay if paid clause alters the common law payment obligation by requiring payment from the owner as a condition precedent to the contractor’s duty to pay a subcontractor or supplier.
What pay when paid explicitly means
“Pay when paid” clauses specify a time period that delays a general contractor’s obligation to pay a subcontractor. Notably, it delays this obligation rather than ever extinguishing it. Unlike the pay if paid scenario, the general contractor now bears the risk that the owner will never pay them. A typical pay when paid clause would spell out a number of days (eg: seven, 14 or 30 days) from the date that the owner pays the general contractor at which time payments to the subcontractors become due.
“…the burden of expressing a clear and unambiguous contingent payment clause falls on the general contractor…”
At first glance, this looks like a very similar clause to the pay if paid variety – with the added component of time. However, it is interpreted very differently.
The majority view in Florida and many other states is that, even if the owner never pays the general contractor, the general contractor will have a little more time but will eventually have to find a way to pay the subcontractors or be liable for damages in a breach of contract lawsuit.
In other words, in a pay when paid scenario, the common law requirement to pay someone for work done is not cancelled, but postponed.
Drafting or reviewing a Florida construction contract
Since the burden of clarity falls on the general contractor, it is very important that general contractors consider whether they want a pay if paid or a pay when paid agreement to govern their subcontractor relationships. In many cases, it is best for the general contractor to transfer the risk completely by drafting an unambiguous pay if paid clause into the agreement. However, if the line can in any way be interpreted as ambiguous, the clause may default to a pay when paid clause that does not shift the payment risk to the subcontractors.
On the other hand, if you are a subcontractor it is also important to review your construction subcontractor agreement before you sign it. Are you prepared to take on the general contractor’s risk of non-payment? Is the document ambiguous and therefore advantageous to you in that it could be interpreted as a pay when paid agreement.
To avoid the potential for misinterpretation and ambiguity, it is best to hire an Florida construction attorney with experience drafting and reviewing construction contractor agreements.
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When reviewing or drafting your next subcontractor agreement be sure to do so with the assistance of a local attorney that has extensive construction law experience. With South Florida Law, you benefit from both big firm resources and small firm attention-to-detail and service. We have the construction law experience and local knowledge necessary to protect your business’ interests. Reviewing or drafting a construction-related agreement? Reach out to South Florida Law today on (954) 900-8885 or via our contact form.