What’s the Difference Between If and When?
It’s hard to believe that two small words can cause such a flurry of confusion and chaos. “If” and “when” are two words that, if and when they are incorporated into a contract, could determine whether or not a subcontractor is paid, regardless of services provided.
Both pay-if-paid and pay-when-paid are considered contingent payment clauses. According to the American Subcontractors Association, Inc. a contingent payment clause is
“…a contractual provision that makes payment contingent upon the happening of some event. In construction subcontracts, the typical contingent payment clause makes the subcontractor’s payment contingent upon the payment of the contractor by the owner.”
So, what’s the difference between “if” and “when”?
Pay-if-paid is generally interpreted to mean that the subcontractor will receive payment from the GC if the GC is paid by the owner. Essentially, a GC paying its subcontractors is conditioned upon the GC receiving money from the owner.
For example, if the owner files for bankruptcy protection and does not pay the GC, then the GC is not obligated to pay the Sub.
Pay-when-paid is generally interpreted to mean that the subcontractor will receive payment from the GC when (or after/once) the GC receives payment from the owner. Typically, this clause includes a timeframe in which the sub will be paid: “Once the owner remits payment to the GC, the GC has 10 days to remit payment to the subcontractor.”
The Public Contracting Institute advises that pay-when-paid is viewed more as a timing provision versus the condition precedent of pay-if-paid. In other words, the GC must pay the Sub within a reasonable amount of time from when the sub invoices.
Which Clause is Better?
Pay-when-paid is better than pay-if-paid, because the GC not relieved of the responsibility to pay his subcontractors if he is not paid. However, payment clauses can be tricky, and you should seek a legal opinion if your contract has a clause you are uncomfortable with.
I follow the blog of attorney Matthew J. Devries & he recently shared a post on a Virginia case of pay-if-paid. In the case he reviewed, the court upheld the enforceability of the pay-if-paid was within the subcontract. I do recommend you read his entire post, The Real Lemon in the Bunch: Understanding Pay-If-Paid Clauses in Construction Contracts, but I want to share one of Devries suggestions:
“Determine as between the parties who should bear the risk of non-payment. 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’.”
Regardless of “if” and “when” clauses, make sure you review your contract carefully to ensure you can secure your mechanic’s lien or bond claim rights.
It’s part two of our three-part series of Commercial Credit Management Tips from NCS. Click here to learn more!
- February 4th: An Advanced Look at the UCC Process
- February 11th: The UCC – A Powerful but Underused Collection Tool in Construction Lending
- February 18th: An Advanced Look at the Lien and Bond Claim Process
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