Must a Contractor Pay a Subcontractor if Unpaid By The Owner?

Nov 23, 2016

One court’s interpretation of “pay when paid” and “pay if paid” clauses.

Is a contractor obligated to pay a subcontractor if the owner fails to pay the contractor? This is a longstanding issue in construction law. The seemingly obvious answer is that it depends upon what the contract between the contractor and the subcontractor stipulates.

The answer, however, is not as straightforward as it might seem. Courts make their decision based upon whether the contract contains a “pay when paid” or a “pay if paid” clause.

As a case discussed in an article in CONSTRUCTION LIITGATION BLOG by Sue A. Schultz, Esq., makes clear, it can be difficult to determine the difference between the two types of clauses.

A recent case examined by Ms. Schultz addresses this issue. Beal Bank Nevada v. Northshore Center THC, LLC, et al, 2016 IL App (1st) 151697.

A contractor in Illinois refused to pay its subcontractor until it received payment from the owner of the project. “The contract involved stated that ‘payment will be made within thirty (30) days after the work called for hereunder has been completed by the Subcontractor to the satisfaction of the Owner and the Contractor and the Contractor has received from the Owner written acceptance thereof together with payment in full for this portion of the work.’”

The 1st District Appellate Court of Illinois ruled that the contractor must pay its subcontractor because their contract contained a “pay when pay” clause. This type of clause, according to the Court did not allow the contractor to withhold payment until paid by the owner.

The Court distinguished a “pay when paid” clause from a “pay if paid” clause by explaining that “under a ‘pay-if-paid’ clause… the risk of non-payment was found to be accepted by the subcontractor, so the contractor had no obligation to pay, if the owner never paid the contractor.”

This distinction does not become readily apparent from a reading of the contract language quoted above.

Therefore, it behooves both contractors and subcontractors to consult their legal counsel before agreeing to a clause that outlines the payment obligations of the contractor to its sub.

Source—

When owners don’t pay— “pay when paid” vs. “pay if paid” clauses in Illinois. Sue A. Schultz, Esq., CONSTRUCTION LITIGATION BLOG, Oct. 12, 2016.