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Letters toThe Editor March/April 2008
Mr. Koprince, I recently read your article, “Is Your Pay-When-Paid Clause Worthless?” in the January/February 2008 issue of Constructor magazine, an AGC publication. While this article addresses the general contractors’ interests concerning payment by a project’s owner, it ignores the numerous subcontractors who make up a sizable portion of AGC members who work under the primary contractor. Articles on this subject that target the primary contractor seem to be more abundant than those directed toward subcontractors. Traditionally, a general contractor has a more direct relationship with the owner of a project, and a better knowledge of the owner’s needs and intents. We, as subcontractors, depend on the primary contractor to ensure that the owner is aware and capable of meeting the financial obligations related to the individual project and, as such, in most cases are encouraged if not prohibited by agreement from direct contact with the owner regarding payment. If the contractor becomes aware of the owner’s inability to meet payment requirements, and that is not immediately conveyed to the subcontractors, the project work continues. When the payment becomes past due, the subcontractors’ exposure can increase dramatically. If the owner’s payments cease, it can result in a tremendous financial burden placed upon the subcontractors. For this reason, we generally ask that any “pay-if-paid” or “pay-when-paid” clauses be amended or stricken from contracts. If the contractor knows that he is liable to the subcontractor for payments within a set timeframe, it will enhance the contractor’s efforts to keep the owners up to date on payments and encourage them to inform the subcontractors if a problem arises, enabling the subcontractors to limit their losses. Even so, there are many times when state laws related to “pay-if-paid” and “pay-when-paid” contract language are necessary to ensure payment of lower-tiered contractors. As a subcontractor, we must continue to encourage the support and enforcement of these statutes. Barry McKeegan
Response: Mr. McKeegan, The cases mentioned in my article are very favorable to subcontractors. These cases say that when a general contractor has not been paid by the owner for the subcontractors’ work, the unpaid subcontractor(s) may sue on the payment bond, even where there is a “pay-when-paid” or “pay-if-paid” clause in the subcontract. The practical effect of these cases is to nullify the “pay-when-paid” clause. Subcontractors obviously prefer that their subcontracts do not contain “pay-when-paid” or “pay-if-paid” clauses. However, in those instances where a subcontractor is unable to negotiate away a “pay-when-paid” clause, it would be helpful for the subcontractor to: ensure that the surety is not named as a beneficiary of the “pay-when paid” clause; if possible, verify that the payment bond does not include “pay-when-paid” language; and for public projects, do not agree to a contractual Miller Act or Little Miller Act waiver. Steven Koprince |
