Pay-If-Paid, Pay-When-Paid Construction Contract Clauses: Avoiding Nonpayment, Jurisdiction, and Other Key Issues

Description

In a PIP provision all payment risk shifts from the general contractor or higher-tier subcontractors to lower-tier subcontractors. This provision provides that the general contractor has no obligation to pay lower-tier subcontractors until the general contractor receives payment from the owner. PIP clauses essentially make the receipt of payment from the owner a condition precedent. Jurisdictional enforceability of PIPs varies greatly, and some states prohibit them and hold them to be void, unenforceable, and against public policy. The enforceability of PIPs in other states is determined on a case-by-case basis.

In contrast, a PWP provision is essentially a function of the timing of payment and not a condition precedent provision. PWPs clauses will typically have specific timing provisions. Ambiguous timing provisions generally allow the general contractor or higher-tier subcontractor a reasonable amount of time to comply with its duty to make payment to a subcontractor or supplier upon the general contractor’s receipt of payment from the owner.

Differentiating between PIP and PWP contractual clauses is immensely important because they can govern whether there is a duty for the general contractor or higher-tier subcontractor to make payment to a subcontractor if payment is never received from the owner. However, both PIP and PWP require construction practitioners to be mindful of the current jurisdictional treatment of these payment provisions, applicable prompt payment laws/acts, and other issues relating to the enforceability of these provisions.

Listen as our authoritative panel of construction attorneys examines the challenging, confusing, and complex payment process. The panel will offer best practices for drafting construction payment provisions that mitigate or shift the risk of non-payment to another party.