A general contractor hires a subcontractor to install custom cabinetry in a new home. The contract between them states that the subcontractor will be paid the final installment of $15,000 "upon the general contractor's receipt of final payment from the homeowner." The subcontractor completes the work, but the homeowner declares bankruptcy and never pays the general contractor. The general contractor then refuses to pay the subcontractor, citing the contract term. What is the legal effect of this clause?
- AIt is generally interpreted as a timing mechanism, meaning the subcontractor must be paid within a reasonable time.
- BIt is an unenforceable clause, and the subcontractor must be paid.
- CIt is a condition precedent, and the subcontractor will not be paid.
- DIt is a valid condition if the subcontractor explicitly assumed the risk of homeowner non-payment.
Show answer & explanationAnswer & explanation
Correct answer: A. It is generally interpreted as a timing mechanism, meaning the subcontractor must be paid within a reasonable time.
Clauses like 'pay-when-paid' are often disfavored by courts because they shift the risk of the owner's insolvency from the general contractor to the subcontractor. Unless the language clearly and unambiguously expresses an intent to create an absolute condition precedent (a 'pay-if-paid' clause) and specifically allocates the risk of owner non-payment, courts typically interpret such clauses as merely postponing payment for a reasonable time, rather than making it an absolute condition. This means the general contractor must pay the subcontractor even if the owner never pays.
Why the other options are wrong
- B. It's not necessarily unenforceable, but its interpretation often changes its effect from an absolute condition to a timing clause.
- C. While it appears to be a condition precedent, courts often interpret these 'pay-when-paid' clauses as timing mechanisms due to public policy concerns.
- D. For it to be a valid absolute condition ('pay-if-paid'), the language must be extremely clear and explicit about shifting the risk of owner non-payment, which simply stating 'upon receipt' typically does not achieve.
Pay-When-Paid Clause
A contractual provision in construction subcontracts stating that the general contractor will pay the subcontractor when the general contractor receives payment from the owner. Courts often interpret these as timing mechanisms rather than absolute conditions of payment.
- Usually interpreted as a timing mechanism, not an absolute condition.
- Payment is due to subcontractor within a reasonable time, regardless of owner payment.
- To be an absolute 'pay-if-paid' condition, language must be clear and unambiguous in shifting risk.
Memory trick: Read between the lines; is it a 'must' or just a 'when'?