When must a subcontractor be paid under a "pay-when-paid" clause?(CONSTRUCTION * CORNER)

It is not unusual for a contract between the general contractor and a subcontractor to contain payment terms such as, "All progress payments of the Subcontract Sum shall be made within 10 days after payment is received by the General Contractor from the Owner." But who bears the risk if the owner does not pay? At first glance, one may believe that the general contractor would not have to pay the subcontractor until the general contractor has received payment from the owner for the work completed. A closer reading would, however, reveal that this payment language may actually be a "pay-when-paid" provision, and not "pay-if-paid". There is a significant difference.

Under a "pay-if-paid" clause, the general contractor is required to pay the subcontractor only if the owner pays the general contractor. The condition precedent to the general contractor's obligation to pay the subcontractor is the owner's payment. If the owner does not pay the general contractor, there is no obligation to pay the subcontractor who bears the risk of the owner's non-payment. The use of the word "if" in the payment provision must be undeniably clear and unambiguous evidence of the parties' intention to condition payment to the subcontractor upon receipt of payment from the owner.

Under a "pay-when-paid" clause, there is no condition precedent to the general contractor's obligation to pay the subcontractor. The "pay-when-paid" language is an absolute agreement of the general contractor to pay the subcontractor within a period of time after the general contractor is paid by the owner. The general contractor bears the risk if the owner does not pay. The general contractor has made an unconditional promise to pay with the time of payment postponed until the happening of a certain event, or for a reasonable period of time if the owner's payment does not happen. Such provisions do not absolutely bar payment, but merely delay the payment by the contractor to the subcontractor for only a reasonable period of time to allow the general contractor to attempt to collect payment from the project owner.

What is a "reasonable time" for the general contractor to wait for payment from the owner before paying the subcontractor? One must look to either: (1) other provisions in the contract which set forth time periods for performance of similar acts or (2) determine when a reasonable time has elapsed. In one recent Ohio case, the court held that 30 to 60 days was a reasonable time to wait before payment would be due after the owner had failed to pay the general contractor.

Just remember, a "pay-when-paid" provision does not relieve a general contractor of its obligation to pay a subcontractor after the owner fails to pay the general contractor. If the intent of the general contractor is to not be responsible for the owner's insolvency or refusal to pay, then such intent must be unequivocally expressed in a "pay-if-paid" clause. The contract language must be precise to shift the risk of payment failure by the owner to the subcontractor. Also keep in mind that a written change order authorizing ...