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Jul 01 2015
Pay When Paid . . . How Do You Deal With It?
Erik Wright, CBF, Spectrum Engineers, Inc.

In my position, because I deal mainly with client centric contracts rather than credit applications, I have had to become somewhat proficient in the nuances of legalese and contract negotiation. However, this has not come easily. Over the last ten years, I have had to rely heavily on the expertise found at our local NACM affiliate, astute insurance agents, and legal counsel for interpretations and advice regarding the myriad of ambiguous and confusing clauses I come across on a regular basis. No matter how many contracts I scrutinize, there is always something new to be found. But, my favorite has to do with the payment terms I often discover.

Perhaps commonplace with others in the construction industry, I frequently have to review onerous and one-sided payment provisions such as, "Payments to _______ shall be made promptly after ________ is paid by the Owner" or "All progress payments of the Subcontract Sum shall be made within 10 days after payment is received by _______ from the Owner." These 'Pay-when-Paid' clauses attempt to pass the risk of the owner not paying on to the subcontractor or subconsultant. But, who actually bears the risk if the owner does not pay? At first glance, one might believe that the client would not have to pay the subcontractor until the client is paid by the owner for the work completed. The answer may be more subtle. A closer look would reveal that this payment language speaks to the timing of the payment and is not conclusive of the right to be paid. Or, in other words, in the ordinary course of business, the subcontractor will have to wait until the contractor is paid but does not give up the right to recover against the contractor in the event the owner never pays the contractor. 

However, more detrimental than the burdensome 'Pay-when-paid' clause is the 'Pay-if-paid' clause! I have learned that the use of the small, unassuming word 'if' possibly creates a condition which could be a precedent for the general contractor obligation to pay you. If the owner does not pay the general contractor, there may be no obligation to pay the subcontractor who would then bear the risk of the owner's non-payment. An example of this: "Payment to _______ shall be made only if payment from owner is received" or the more deliberate "Payment by the owner to _______ is an absolute condition precedent to payment by _______ to _______." In this scenario, the GC may be more successful in its attempt to pass the risk of the owner's nonpayment to you.

Because generally I am in no position to assess the financial strength of the owner, my first line of defense is to have these types of terms removed from our agreement and replaced with our payment terms. However, this is easier said than done. While the 'Pay-if-paid' would be a deal breaker, these types of terms seem to be the de facto norm in my industry. Regardless of whether or not these terms exist in our agreements, the excuse that I am given more than 90% of the time is "you haven't been paid because we have not been paid." So how do you handle these excuses?

This line is more nebulous than the 'promising' excuse that "payment will be made in full as soon as the expected large payment is received this month" and because there really is no way for me to really know whether or not they have been paid, I have to assume it is a cash flow problem and handle it in such a manner. Here are a few things to keep in mind:

* Find out what it is that they are waiting for before they will be able to pay you
     - Are they waiting for the project to complete before they can bill?
     - Are they waiting on a receivable to be paid?
     - Once they are paid will you be paid in full?

* You should always request to have a copy of their 'prime agreement' and that in order to extend these types of terms you have to have a copy of the contract specifying when they are to be paid (of course you should already have this on file prior to beginning any job). However, I have found that by asking for them to help identify their terms can sometimes eliminate this excuse if it isn't actually in there. 

* Challenge the debtor to exactly what monies they are waiting to receive and how soon. When appropriate, mention your lien or bond rights; you can be the 'bad cop' and let them be the 'good cop' in the owner's eyes. Offer to help them get paid faster by insinuating your company's firm policy of filing liens.

     - While you may have difficulty collecting on a payment bond if you have a 'pay-if-paid' agreement, you shouldn't have any difficulty going after the payment bond surety if you have a 'pay-when-paid' clause in your agreement. There is case law to support.

* Set up a follow-up time, and stick to it.

If you follow up when they thought they would be paid and they are vague with the new reason why payment has been delayed, chances are you are dealing with an excuse.

Request a partial or progress payment.

If your client is in the same predicament as you are, in that they are waiting to be paid by the owner, you should expect them to give you detailed information as to why they are not paid and when payment will be made. Unless you are given specific details, you should handle this as an excuse rather than a legitimate reason that you have not been paid.