In this blog, presented by SunRay Construction Solutions and J. Don Overton, Founder and Principal, The Overton Firm, we will explain what pay if paid means and what pay when paid means, what is the difference between them, how do they affect your payment, and more pertaining to the laws of Arkansas.
Pay When Paid vs. Pay If Paid – Distinction
Nonpayment is a prevailing risk in the construction business, and one of the first things to protect yourself against this risk is to read your contract and highlight the payment terms mentioned. You need to especially look for specific language, such as payment is based on pay if paid or pay when paid. Not many people realize that there is a huge distinction between both these languages. Which is why, it is highly recommended that you go through your contract, estimate, invoice, or any other documentation to check the language.
Also, when you check the contract before the project starts, it gives you time to negotiate the terms and change the language if required. Once you sign the contract, you cannot make any amendments, and you may end up facing severe nonpayment issues in the future.
One of the major differences between pay if paid and pay when paid is whether or not you will eventually get paid for the job. In 2014, the Arkansas Supreme Court made a definitive ruling that if your contract has pay if paid language, then you cannot get paid. What this means is that if the general contractor does not get paid by the owner, then subcontractor will not get paid and if you are a supplier, then you will not get paid if the subcontractor has not been paid by the contractor. A major roadblock with this is that you cannot even file a lien because a lien can be filed only if money is dues and it has not been paid.
To explain this better, let’s take a look at the case Travelers Casualty v. Sweet’s Contracting, 450 S.W.3d 229, 2014 Ark. 484 (2014). The contract had the pay if paid clause which resulted in a triggering event of payment. This means that unless the owner of the project does not pay the general contractor, the general contractor is under no obligation to pay the subcontractor, irrespective of whether or not the work was done, whether or not the work was accepted, or whether or not the work is being used. These factors do not come in the picture if the pay if paid clause is used.
So, in this case, the circuit court dismissed the claims with prejudice. What does with prejudice mean? It means that the subcontractor is forbidden from ever filing a claim against the general contractor when it’s with prejudice.
Legal Effect of Valid “Pay if Paid’ Contract Language
A typical pay if paid clause might read as: Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk.
Under a pay if paid provision in a construction contract, receipt of payment by the contractor from the owner is an express condition precedent to the contractor’s obligation to pay the subcontractor.
A pay if paid provision in a construction subcontract is meant to shift the risk of the owner’s nonpayment under the subcontract from the contractor to the subcontractor.
In Arkansas, it is not required to have the pay if paid clause mentioned in detail in the contract. It can even be a simple statement stating that payment should be tendered to the subcontractor only if the contractor receives it from the owner first.
On the contrary, a pay when paid means that the contractor will pay the subcontractor when it receives payment from the owner, within a reasonable standard of time. So, if the clause does not have the magic word ‘if’, then it means that the payment clause is considered as pay when paid.
What is a “Reasonable Time” to Get Paid?
Unfortunately, there is no legal definition for what defines a reasonable amount of time to get paid under the laws of Arkansas. However, there are a couple of ways in which you can apply the standard of reasonable time.
- If you are working on a commercial project where you submit your draws on a monthly basis to the GC if you are a subcontractor or to the owner if you are GC, and the owner makes the payment every month, then a reasonable time to make the payment would be that the payment should be made at the next draw scheduled date, and no later than that.
If in case you are not paid by the next draw scheduled date, then you need to send your lien notice, so that your lien rights are protected.
- If you are working on a residential project or a small commercial job which does not have a monthly draw schedule, and instead has a quarterly draw or it is based on the date when a percentage of the work is completed, then a reasonable time to get paid would be either at the time or before payment is made for any subsequent work is completed after your work.
For example, if you are a framer, you should be paid for your framing work either at the same time or before the installation person or the drywall person gets paid. If you don’t get paid, then it is considered unreasonable because the subsequent work has covered up your work and they have beep aid but you have not.
So, although there is no definite definition for a reasonable time under the Arkansas law, you can use the above standards to determine the reasonable time if your contract has the pay when paid clause.
- The difference between ‘if’ and ‘when’ is crucial and it depends on how the clause has been drafted in the contract.
- A pay if paid provision clearly states that the subcontractor will be paid if the contractor received payment from the owner. The consequences that the subcontractor may face include the risk of receiving no payment or receiving payment long after the work has been completed.
- A pay when paid clause means that the contractor can only withhold payment from the subcontractor for a reasonable time while waiting for payment from the owner. Once this reasonable amount of time passes, the contractor will have to make the payment to the subcontractor, irrespective of whether or not the owner has made the payment to them.
This is why it is important that you read the contract carefully before starting the project and negotiate the payment terms because once the contract is signed and if payment issues arise, there is not much that you can do.