General Contractors may seek to condition payments to Subcontractors by using “pay-if-paid” or “pay-when-paid” clauses in their contracts. Typically, as the name suggests, pay-when-paid provisions concern the timing of payment by the General Contractor, but, arguably, do not relieve the General Contractor from its obligation to pay the subcontractor. On the other hand, pay-if-paid clauses attempt to shift the full risk of payment from the project owner from the General Contractor to the Subcontractor by making the General Contractor’s payment under the subcontract conditioned upon payment by the Owner.
In 2018, the Maryland Court of Appeals examined a pay-if-paid provision in Young Electrical Contractors, Inc. v. Dustin Construction, Inc., 459 Md. 356 (2018). While this case was decided under Virginia law, the Court reviewed Maryland's decisions on the issue. The hardline rule is that these provisions are to be construed as timing provisions -pay-when-paid clauses- unless the contract language indicates that the parties intended otherwise. Id at 368. In Gilbane Bldg. Co. v. Brisk Waterproofing Co. 86 Md. App. 21, 585 A.2d 248 (1991), the Court considered what language would shift the risk of an owner’s bankruptcy from the general contractor to the subcontractor. The contract in this case stated, “It is specifically understood and agreed that the payment to the trade contractor is dependent, as a condition precedent, upon the construction manager receiving contract payments, including retainer from the owner.”
The Maryland Court of Special Appeals concluded that the contract language was unambiguous and unquestionably established a condition precedent to the construction manager/general contractor’s obligation to pay the subcontractor. The Court found that, based upon the contract language, the construction manager/general contractor was not obligated to pay the subcontractor unless and until the owner paid the construction manager/general contractor.
The District of Columbia has enacted a “prompt payment statute” to address issues of payment to private contractors and subcontractors. The legislation known as the “Private Contractor and Subcontractor Prompt Payment Act of 2013” specifically addresses pay-if-paid and pay-when-paid clauses, and states that “conditions of payment to the subcontractor on receipt by the contractor of payment from the owner may not abrogate or waive the right of the subcontractor to:
(1) Claim a mechanics’ lien; or
(2) Sue on a contractor’s bond."
D.C. Code § 27-135.
Additionally, any provision of a contract made in violation of this act is void as against the public policy of the District of Columbia. Id. In Urban Masonry Corp. v. N&N Contractors, Inc., 676 A 2d 26 (D.C. 1996) the Court held that when a pay-if-paid clause is contained within a construction contract, receipt of payment from the General Contractor is a condition precedent to payment being owed by the contractor to the subcontractor.
Ultimately, these cases show that the language of the contracts you sign is of utmost importance. If you find yourself in a contract dispute or if you are contemplating signing a contract containing these clauses you may want to consult with legal counsel to help you navigate these complex legal issues.