This blog was taken from a webinar presented by SunRay Construction Solutions and Alex Barthet, a board-certified construction lawyer who serves clients Florida. In this blog, we will discuss pay-when-provisions, why they suck, and how to get paid anyways.
The following points will also be discussed:
What is a Pay-when-Paid Provision?
Let us start with understanding what a pay-when-paid provision is. Put simply, a pay-when-paid provision is a contract provision in a written contract that shifts the risk of non-payment from one party to another. It is most common between general contractors and subcontractors. But it also exists between subcontractors and sub-subcontractors.
If owner does not pay contractor, contractor does not have to pay subcontractor
For example, with such a provision in place, if the owner does not pay the contractor, the contractor does not have to pay the subcontractor.
This is a legal defense to payment
These are valid legal defenses in the state of Florida. If you have a pay-when-paid provision in your contract and it is enforceable, a court is going to enforce it and you will suffer the consequence or benefit of it, depending on which side of the transaction you are on.
Pay-when-paid provision probably exists in almost every contract you sign
Almost every contract has a valid and enforceable pay-when-paid provision, meaning that it has the magic language. Only one in 1,000 contracts have a mistake that someone may have made in drafting it, so that is very rare.
What is the Magic Language that Makes a Pay-when-Paid Clause Enforceable?
Now we will look at the magic language that we mentioned above. For a pay-when-paid provision to be enforceable, it has to have certain magic words.
The words include ‘condition precedent’ or ‘contingent upon’
Those words are very easy to spot. They have to say ‘condition precedent’ or ‘contingent upon.’
Sample invalid provision
Here is a provision that you should not add to a contract:
Under no circumstances shall the contractor be obligated to pay the subcontractor until funds have been advanced by the owner.
As you may have noticed, it does not have the magic language in it. As a result, a court will hold this provision to be unenforceable. This means that if you are a subcontractor and you sign a contract with the general contractor, and it has this provision in it, that means even if the contractor is not paid by the owner, that contractor still has to pay the subcontractor.
Sample valid provision
Now we will have a look at a provision that you should add to a contract.
Final payment shall be made within 30 days of completion of the construction project, acceptance by the Owner, and as a condition precedent, receipt of final payment from the Owner.
So, as you can see, this provision has the magic language, which means if you sign a subcontract with a contractor and it has this line, then the contractor does not have to pay you. This means that even if you do all your work, you deliver al materials, and do everything right, if the one thing not in your control (the owner paying the contractor), happens, then you do not get paid.
This is why these provisions are so dangerous and you need to be aware of how they work.
As a General Contractor, What Do I Do?
Now we will have a look at every party in this transaction and kind of dissect what they can do to deal with this provision.
a. Make sure your pay-when-paid clause contains the required language
If you are a general contractor, you want to make sure that your pay-when-paid clause has the magic language. So you will need to take out your contract with your subcontractors and make sure that it has ‘condition precedent’ or ‘contingent upon’ language wherever the pay-when-paid provision exists. More likely than not, it does, but you want to verify that it is there.
b. If the language is not there, the provision could be considered ambiguous and not enforceable
If the language is not there, make sure that you add it and know that if it is missing, then that provision is not going to be enforceable. Meaning, if you as the general contractor are not paid by the owner, you will still have to pay your subcontractors.
c. If you bond the job, your bond is not subject to the pay-when-paid defense
If you are a bonded general contractor, your bond on that project is most-likely not subject to this pay-when-paid provision. This means that if you bond a project which means all public jobs and any private jobs that you bond. If you have a pay-when-paid provision in your subcontractor and it has the magic language, and you issue a bond, the subcontractor may not be able to pursue you if you are not paid by the owner.
But they can still pursue your bond company. Because they do not have the legal benefit of your pay-when-paid provision. So, just know that if you issue payment and performance bonds for the work you do, that you may still be liable even if you have a pay-when-paid provision in your contract.
When subcontractors are represented, this is used for them to get paid. The bonding company is pursued to get paid, even though there is a pay-when-paid provision in the contract.
d. If you agree with the owner to pay your final bills before you get paid, it may invalidate your subcontract pay-when-paid provision
This next issue is a lot more complicated. As a a general contractor you want to keep your pay-when-paid provision enforceable based on the language that exists or may exist in your prime contract.
If you are a contractor and you sign a contract with an owner, the owner is going to want to make sure that before they issue the final payment to you, that you as the general contractor have paid all your bills. The way they do this is they have a final payment provision in your contract that say before we owner pay you general contractor, the last payment, you are going to give us a release showing that you have paid all your bills.
When that provision exists in your contract with the owner, even if you have a valid and enforceable pay-when-paid provision in your subcontract, which means you have the magic language in your subcontract, there are legal cases in the state of Florida that say when those two provisions are read together (meaning the valid pay-when-paid provision and the pay all your bills with the owner in your prime contract) they invalidate your pay-when-paid provision with your subcontractor.
This means that when you sign a contract with your subcontractor, you want the magic language, but you also want to make sure that when you sign a contract with the owner that you do not agree to a provision that requires you to pay your vendors in full before the owner pays you. You want to carry those trailing releases a few days past the final payment. By doing this, you will keep your pay-when-paid provision in your subcontract enforceable.
Force the subcontractor to keep working during a dispute
You want to keep your subcontractors working during the course of the dispute. This is not directly related to the pay-when-paid, but it is an important provision.
Provision to keep subcontractor working during dispute
Subcontractor shall diligently proceed with the work during any dispute, even as it relates to payment or charges. The existence of a dispute shall not be grounds for any failure to perform by Subcontractor.
So be aware as a contractor that you want to make sure you keep your subcontractors working even during the course of a dispute or non-payment issue.
As a Subcontractor, What Do I Do?
Now as a subcontractor, what can you do to deal with these pay-when-paid provisions?
a. Try to strike the provision or the magic language
The first thing we would suggest is in the course of your negotiations with the contractor, try to either strike the provision or the magic language. It does not always work and for those of you who think you cannot negotiate your contract with the general contractor, that it is take it or leave it, that is not true. You can provide addendums.
Contractors will make more changes than you think. They want you to believe they will not, but if you do not try and do not ask, you will not make any progress. So we suggest that you work to try to make some changes to the general contractor’s contract. You may not be able to make changes to the pay-when-paid provision, but you should try.
b. Look at the prime contract
Next, you should try to look at the prime contract. Many prime contracts are incorporated into your subcontract, and they include a provision in the prime contract that requires the contractor to pay all their bills before they can be paid by the owner at final payment. As mentioned before, those types of provisions if they exist in the prime contract, invalidate your pay-when-paid provision.
So again, it may not directly affect your negotiations, but it would be nice to know if that provision existed in the prime contract so you know that maybe if you get to the end of the job that the pay-when-paid provision is not enforceable.
c. Lien or make a bond claim
The most important things you need to be aware of as a subcontractor to deal with the pay-when-paid provision are to secure your lien rights or bond claim rights if you have them.
Lien rights are no subject to the pay-when-paid defense, and in most instances, neither are claims on the contractor’s payment bond. So, if you sign a contract with a contractor and there is a pay-when-paid provision in it, the owner has not paid the contractor so the contractor does not have to pay you. If you properly secure your lien rights, you will still have a lien on the project.
The same is true for your rights against a payment bond. Even if the owner does not pay the contractor, in most cases you will still have a claim against the general contractor’s payment bond.
So it is critical that you secure you secure your lien and bond rights.
d. Try to negotiate a ‘stop work’ provision into the contract
Try to negotiate a stop work provision into your contract. You may not be able to delete or change the pay-when-paid provision, but you can probably include a stop work provision in your contract. This would read something like:
Subcontractor can slow or stop work without liability or penalty if it has not been paid its draw request in 30 days after submission.
Now, maybe it is not 30 days, maybe it is 45 days or 60 days. The key is that what you want to prevent is the obligation to continue to pay your labor or continue to pay for materials and deliver product to the site when you are not getting paid. So, you may not be able to undo a pay-when-paid provision but you at least need to be able to stop the bleeding.
And the way you do this, is to include a specific stop work provision in your subcontract.
What About My Lien and Bond Rights?
In Florida, the following parties have lien or bond claim rights:
- Architects, engineers, and land surveyors
- Contractors (those in direct privity with the owner)
- Subcontractors (anyone who provides labor or materials to contractor)
- Material suppliers/rental companies to owners, contractors, subcontractors, and sub-subcontractors.
This is the furthest down you can go on the lien and bond rights. So if you are a material supplier who provides electric material to the sub-subcontractor, you have lien rights. Or maybe you rented an excavator to the sub-subcontractor, you still have lien rights.
The individuals who do not have lien or bond claim rights are:
- Material suppliers to material suppliers
An example of the first group is, a GE sells switch gear to an electrical supply house which then sells it to an electrician, GE does not have lien rights. The electrical material supply house does.
Now we will take a quick refresher on how to secure your lien rights:
Step 1: Serve Notice to Owner or Notice to Contractor
No later than 45 calendar days from your first work on the job, you need to serve a Notice to Owner or Notice to Contractor. They are very similar forms to secure your lien and bond rights. For liens you do not need to serve one if you have a direct contract with the owner. If you are a general contractor and your contract is with the owner, you do not have to serve a Notice to Owner to still have lien rights.
If you are pursuing a claim on a payment bond, if your contract is directly with the bonded contractor, you do not need to serve a Notice to Contractor. If you are the electrician as a subcontractor and your contract is with the bonded general contractor on a school board project, you do not need to serve that first 45-day notice.
We advise that you have a process in your office that no matter what, any job over a certain amount gets noticed, so you avoid having to make a decision on which job needs it and which does not. More often than not, it is not worth trying to figure that out. Just notice every job over a certain amount.
Step 2: Record your lien or serve a Notice of Nonpayment
Within 90 days of your last work, you must record a Claim of Lien to secure your lien rights or serve a Notice of Nonpayment to secure your rights against the payment bond. That is 90 calendar days and know that the last work does not include punch list or warranty work.
It has to be real substantive work. It can be base contract work or change order work, but it cannot be punch list or warranty work that counts for those 90 days. When you count those 90 days, remember that 90 days is not three months.
So counting it out as June 7, July 7, and then August 7 is a mistake because some months have more than 30 days and one has less than 30 days. So, the way you count is, you count every calendar day starting the day after your last day of work.
If today is your last day of work, tomorrow is Day 1. You count every calendar day including weekends and legal holidays. When you get to the 90th day, that is the day that the lien has to have been recorded in the public record, or has to have been received by the contractor or the surety for the Notice of Nonpayment.
The only exception is if the 90th day lands on a Saturday or Sunday, or legal holiday where the courts or mail are closed. Then you can roll it to the next business day. So, if the 90th day is Saturday, it goes to Sunday, which then goes to Monday, and if Monday the courts are closed and you cannot take anything to recording, then it would be Tuesday.
Step 3: Serve the lien on all interested parties
Step 4: For liens, those in privity with the owner must provide Contractor’s Final Affidavit
Only for lien rights, those that have a direct contract with the owner must provide a Contractor’s Final Affidavit at least five days before filing suit on the claim of lien. So, if you have a direct contract with the owner, you need to record your lien, and serve a Contractor’s Final Affidavit. It is a simple form that says you are a contractor, you are owed this much money, this is the owner, and these are the people who are unpaid if anyone is there.
This document does not get recorded, it just gets served on the owner. That has to happen at least five days before you file suit to foreclose on your Claim of Lien.
Step 5: For liens, file lawsuit to foreclose and for bonds file a lawsuit against the bonding company and contractor
The final step for liens, is you have to foreclose on your lien within one year of the recording date of the Claim of Lien. So, if I record the lien today, I have one year to file my lawsuit to foreclose. You should not wait that long, but that is the outside deadline that you have.
For claims on a payment bond, you need to file your lawsuit against the bonding company and the contractor within one year from your last work. Notice the difference for liens – it is the recording date of the Claim of Lien. For bonds, it is one year from your last work. So you have different time periods for how long you have to pursue those claims.
Exceptions apply to every rule
Every single rule that is mentioned above has exceptions. These rules are very complicated and there are a lot of exceptions that you need to be aware of. We have just gone over high-level issues.