One of the gravest risks in any construction project is financing. What happens to contractors/subcontractors when funds/financing from the Owner are lost in a construction project? Well, depending on the way the contracts between the Owner-Contractor-Subcontractor-Vendor’s are drafted, work performed may go without compensation if a Pay-if-Paid provision is in a contract… Yes, even where the contractor/subcontractor/vendor has performed the work!
This is particularly true in the DC/MD/VA area where the 4th Circuit in Universal Concrete Products Corp. v. Turner Construction Company (http://pacer.ca4.uscourts.gov/opinion.pdf/091569.P.pdf) held that a “pay if paid” clause in a subcontract was not ambiguous and, therefore, enforceable against a subcontractor who had performed substantial work on the Granby Tower Project in Norfolk, VA. Even though the work was performed, the subcontractor still could not seek reimbursement. All because of one small provision in the contract that stated, in pertinent part, “…payment under this agreement… is subject to the express condition precedent of payment therefore by the owner.” So if the Owner of a construction project loses funding and does not pay the Contractor, the Contractor has no liability or duty to pay the Subcontractor when the pay if paid provision exists.
So, what should your contracts provide?
v Determine who will bear the risk of loss. If you are a general contractor, you should make sure that your subcontracts include clear and unambiguous language placing the risk of loss for non-payment on the subcontractor. In addition to putting a timing mechanism on payment of funds to the subcontractor following a certain number of days after payment by the owner, it is also advisable to include a clause that “payment by the owner to the contractor is a condition precedent to payment by the contractor to the subcontractor.” In addition, you can make your subcontracts explicitly clear by stating that “the subcontractor assumes the risk of non-payment by the owner due to insolvency or other inability to pay.”
v Get legal advice. Either way, you should contact an attorney within your jurisdiction to determine whether there are any limitations of the enforcement of these (and other) types of clauses. Since each state differs dramatically, it is in your best interest to determine the applicable standard in your state or the applicable law where the project is located or the governing law of the contract to determine this information.
It is imperative and well worth the effort to seek legal advice on these issues prior to drafting and executing contracts with other parties.
