Pay When Paid Clauses in Construction Contracts

Posted in Litigation

Whether you are a general contractor or a subcontractor, you have probably come across a pay when paid clause within a subcontract or general contract. The idea of the clause is that the contractor or subcontractor would not be responsible for payment to a lower-tier contractor unless and until it has received payment pursuant to its contract with an upper-tier contractor or owner. While this is a good idea, the Courts have often found such provisions to be unenforceable.

In general, New Jersey Courts have found that pay when paid clauses in contracts are not enforceable in the sense that they do not create a condition precedent to payment being made to a lower-tier contractor, but instead, the Courts often view these clauses as only affecting the timing of payment. As such, most of the paid when paid clauses are ultimately viewed as unenforceable by the Court should the upper-tier contractor not receive payment, and thus, this contractor must nonetheless tender payment to its subcontractor or supplier.

On the other hand, should a Contractor carefully and artfully draft a paid when paid clause it might be viewed as enforceable by the Court. Specifically, the clause must include express language which clearly states the parties’ intentions are to shift the collection risk from contractor to the subcontractor should the contractor not receive payment from the owner or higher-tier contractor. In order for a pay when paid clause to be enforceable this shifting must be delineated in clear and unequivocal language within the subcontract. It cannot be assumed nor inferred. As a result, the use of words such as “when” and “if” would render such a clause unenforceable. An attorney who knows how to properly word one of these clauses can draft and create one that would be enforceable under current New Jersey law which would favor the upper-tier contractor or subcontractor.

Because of the highly specific nature of the law in this regard, it is suggested that any contractor who wishes to utilize a paid when paid clause consult with an attorney who is skilled in this area. Provided the clause is drafted carefully and signed off by the lower-tier contractor, it should ultimately be enforceable before a Court of law. A simple error within the clause, however, may render it unenforceable.