If and when the General Contractor receives payment from the Owner on account of the Subcontractor's work, it shall pay said sum to the Subcontractor, less an amount of five percent (5%) or greater amount as may be withheld by Owner, which shall be held as retainage. It is expressly acknowledged that receipt of payment by the General Contractor from the Owner on account of the work performed by the Subcontractor shall be a condition precedent to any obligation by the General Contractor to make any payment to the Subcontractor.
The subcontract language above is a typical "pay if paid" ("PIP") clause. The purpose of a PIP provision is to permit the general contractor ("GC") to shift to its subcontractor ("Sub"), the risk of non-payment from a project owner ("Owner"). Generally speaking, courts have held that PIP clauses are enforceable by a GC against its Sub if the clause clearly and unequivocally provides that the GC's payment obligation to the Sub is expressly conditioned upon the receipt by the GC of payment by the project Owner. In other words, the PIP clause must provide that the GC's receipt of payment from the Owner, is an express condition precedent to the GC's payment obligation to the Sub. If properly drafted, the PIP clause insulates a GC from payment liability to its Sub(s) when and until it receives payment from the Owner.
A PIP clause which fails to include the "magic words" that expressly establish payment by the Owner to the GC as a condition precedent to the GC's payment obligations to its Sub(s) is a "Paid When Paid" ("PWP") clause. An example of a PWP clause is:
Each progress payment will be distributed to Subcontractor(s) within three (3) business days after the Contractor receives payment from the Owner. The Contractor shall promptly pay each Subcontractor upon receipt of payment from the Owner, out of the amount paid to the Contractor, by the Owner, for the Subcontractor's work.
Unlike the PIP clause, the PWP provision above creates no express condition precedent as to the GC's payment obligation to its Sub(s), and therefore, such a clause would likely be interpreted by a court as a "timing of payment clause" which would merely delay the GC's payment obligations to its Subs for a reasonable period of time after the submission of the relevant requisition to the Owner.
Even if your subcontract contains a properly drafted PIP clause, if your actions or inactions prevent fulfillment of the condition (i.e., your receipt of payment from the Owner) then you can be barred from asserting the PIP clause as a defense to the payment claim(s) of your Sub(s). The "Prevention Doctrine" permits a court to find that a contractual condition precedent such as a PIP clause be rendered inoperative if the GC improperly prevents the event from occurring. Examples of GC actions that could give rise to the Prevention Doctrine are: a GC's breach of its contract obligations with the Owner, as a result of which, the Owner withholds payment from the GC; a GC's failure to timely and properly submit a Sub's pass-through claim to the Owner which failure of claim submission compliance results in the denial of the Sub's pass-through claim by the Owner; or a GC's failure to properly and timely submit a Sub's extra work claim to the Owner which results in the denial of the Sub's claim.
A GC's ability to employ and enforce PIP clauses against their Sub(s) varies from state to state. Take a minute to review your subcontract and this issue with your attorney, and confirm that your PIP language is unambiguous, properly drafted and is in accord with the common law of the state in which your subcontract is executed and your project is located. A failure to either include a properly worded PIP clause in your subcontract, or to know how the Courts' in your project state interpret and enforce same, could leave you with nothing but a PWP clause which will require you to render payment to your Sub in a "reasonable time period" whether you have been paid by the Owner or not.
Construction Business Owner, April 2006
