Pay-if-paid clauses seem like they’re everywhere
these days. Even if you’re performing work on a project subject to the
laws of states such as California, New York or North Carolina, where
pay-if-paid provisions are not enforceable, you’re bound to run into
them if you expand your market out-of-state. These clauses are not
something to take lightly.
The pay-if-paid clause makes your right to be paid contingent
on the payment of your customer by some other party, usually a
construction owner. For example, your customer might avoid paying for
extra work it ordered because the owner never approved and paid for it.
(By contrast, a typical pay-if-paid clause will be interpreted to require
payment within a "reasonable time" if your customer never
receives payment.)
The proliferation of the pay-if-paid clause is a cause
for alarm. Besides being a heavy-handed and exculpatory contract clause,
pay-if-paid also is an affront to the professionalism of construction
contractors and subcontractors. There is no other industry in which a
pay-if-paid clause would be taken seriously. The mere act of offering or
accepting a pay-if-paid clause without seeking alternative language sets
the construction industry apart — and not in a positive way.
Part of setting higher professional standards in the
industry is to educate customers about why they should not include
pay-if-paid terms in their contracts. You may point out some of the
deficiencies of pay-if-paid clauses.
It’s not true that "it has always been this
way." Pay-if-paid clauses have gained currency in recent years, and
especially since 1998, when the Associated General Contractors of America
published its 655 document, specifically containing a pay-if-paid clause.
Pay-if-paid may forfeit lien and/or bond protections.
Courts in different states have approached the question of how a
pay-if-paid clause affects lien and bond rights differently. Your customer
should not expect you to perform work under a contract that could void
these critical payment protections.
If your customer values your work, it will respect your
right to be paid, as customers in other industries do with their service
providers. You have your own suppliers and subcontractors to pay. Your
customer’s acceptance of your desire not to work under pay-if-paid
conditions is a sign of trust and a minimum standard for doing business.
These are just a few ideas to help improve the
experience of handling contingent payment issues. ASA’s Payment Advocacy
Year (PAY!) Web page at
www.asaonline.com/pay.htm
