Most Florida contractors include contingent payment clauses in their contracts with subcontractors. It is important for subcontractors to understand the payment provisions of contracts before they agree to perform work. There are two primary types of contingent payment clauses in construction contracts, including pay-if-paid contingent clauses and pay-when-paid contingent payment clauses.
Pay-if-paid contingent clauses
A pay-if-paid contingent payment clause means that the contractor will not have an obligation to pay the subcontractors unless the owner pays the contractor first. This type of contingent payment clause effectively shifts the risk of nonpayment from the contractor to the subcontractors. If the owner does not pay the contractor, the subcontractors will have little recourse for recovering payment. However, when pay-if-paid clauses attempt to waive the subcontractors’ rights to pursue lien and bond claims, they will likely be unenforceable.
Pay-when-paid clauses mean that a contractor will pay the subcontractors within a reasonable time after the work is performed even if the contractor has not been paid for the work by the owner. These types of clauses do not shift the risk of nonpayment from the contractor to the subcontractors in contract disputes and are instead regarded as a promise to pay. Pay-if-paid clauses that are unclear might be regarded as pay-when-paid clauses.
While contingent payment clauses are common, they must be drafted in a manner that complies with the state’s contract laws before they will be considered to be enforceable. If a court deems a contingent payment clause to be unenforceable, the contract might be severed from the payment clause. However, in some cases, an unenforceable contingent payment clause will not be severable from the contract. For example, when a payment term is made a material contract term by its language, a court might deem the entire contract to be void.