A general contractor hires a subcontractor to install custom cabinetry in a new home. Their agreement states, 'Payment to Subcontractor is contingent upon receipt of payment from the Owner to the General Contractor.' The general contractor completes all work, but the owner files for bankruptcy before making the final payment to the general contractor. Can the subcontractor successfully sue the general contractor for payment?
- AYes, unless the contract explicitly stated that the general contractor bears no risk of owner non-payment.
- BNo, but the subcontractor can sue the owner directly in bankruptcy court.
- CYes, because 'pay-when-paid' clauses are generally unenforceable as against public policy.
- DNo, the clause is a 'pay-when-paid' clause and makes payment from the owner a condition precedent to the subcontractor's payment.
Show answer & explanationAnswer & explanation
Correct answer: A. Yes, unless the contract explicitly stated that the general contractor bears no risk of owner non-payment.
Courts often interpret 'pay-when-paid' clauses as merely timing mechanisms for payment, not as conditions precedent to payment, to avoid shifting the risk of owner insolvency to subcontractors. To effectively shift the risk, a clause must be very clear and unequivocal, often referred to as a 'pay-if-paid' clause. Without such clear language, the general contractor remains liable.
Why the other options are wrong
- B. This is incorrect. The subcontractor's contract is with the general contractor, not directly with the owner, for payment purposes.
- C. This is incorrect. While disfavored, they can be enforceable if drafted very clearly to shift risk.
- D. This is incorrect. Courts generally disfavor interpreting these as true conditions precedent unless the language is extremely clear.
Pay-When-Paid vs. Pay-If-Paid
Contract clauses in construction. 'Pay-when-paid' typically dictates timing; 'pay-if-paid' shifts the risk of non-payment to the subcontractor, making owner payment a condition precedent.
- Courts disfavor 'pay-if-paid' (risk-shifting) clauses.
- Language must be unequivocal to be 'pay-if-paid'.
- If ambiguous, interpreted as 'pay-when-paid' (timing mechanism).
Memory trick: Is it 'when' the money arrives, or 'if' it arrives at all? That's the key to construction payment clauses.