A general contractor entered into a contract with a subcontractor for plumbing work on a new apartment building. The contract specifically stated, 'Payments will be made to Subcontractor upon receipt of payment from the Owner.' The subcontractor completed its work but has not received payment from the general contractor. The general contractor claims the owner has not yet paid them. Is the general contractor obligated to pay the subcontractor, assuming the owner's non-payment is not due to the general contractor's fault?
- AYes, because the clause is a covenant, not a condition, and the general contractor must pay within a reasonable time.
- BNo, because the general contractor is an intended third-party beneficiary of the owner's payment to the general contractor.
- CNo, because the clause creates a condition precedent, and the general contractor's duty to pay has not yet arisen.
- DYes, because the subcontractor has completed its work, and conditions on payment are disfavored by courts.
Show answer & explanationAnswer & explanation
Correct answer: A. Yes, because the clause is a covenant, not a condition, and the general contractor must pay within a reasonable time.
Courts generally disfavor interpreting clauses like 'payment upon receipt from owner' as true conditions precedent to payment to a subcontractor. Instead, they are usually interpreted as 'timing clauses' or covenants, meaning the general contractor must pay the subcontractor within a reasonable time, even if the owner has not paid. This avoids placing the risk of owner non-payment entirely on the subcontractor, who has no direct contractual relationship with the owner. To create a true condition precedent, the language must be much clearer and more explicit, such as 'payment only if and when payment is received from the owner.'
Why the other options are wrong
- B. The general contractor is a party to the contract with the subcontractor, not a third-party beneficiary of their own contract.
- C. This phrasing is generally not explicit enough to create a true condition precedent for payment to a subcontractor.
- D. While conditions are disfavored, the stronger reason is the interpretation of this specific type of clause as a timing mechanism rather than a true condition.
'Pay-When-Paid' Clauses
Contractual clauses in construction subcontracts that attempt to make a general contractor's payment to a subcontractor contingent upon the general contractor's receipt of payment from the owner. Courts often interpret these as 'pay-if-paid' (true condition) or 'pay-when-paid' (timing mechanism) depending on the explicit language.
- Courts generally disfavor interpreting them as true conditions precedent (pay-if-paid).
- Unless language is extremely clear ('only if and when'), they are often interpreted as setting a reasonable time for payment ('pay-when-paid').
- The risk of owner non-payment typically remains with the general contractor under a 'pay-when-paid' interpretation.
- Some states have statutes or public policy that limit the enforceability of 'pay-if-paid' clauses.
Memory trick: Conditions stop, Covenants just compel!