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Pay When Paid vs Pay If Paid by Christina Gonzalez

Contingent Payment Clauses for the Subcontractor

Imagine that you have signed a contract with a new general contractor. You have worked diligently to complete the work under contract and have complied with all of the contract requirements for your scope of work. After finishing the work, you have submitted your pay application/invoice to the general contractor for payment. The response you get from the general contractor is every contractor's worst nightmare, there will be no payment at this time. Even worse, the general contractor points you to a section of the contract that you signed that allows your payment to be contingent on the general contractor's payment from the owner. You ask yourself how could have missed something so important in the contract. Below is a description of the two types of contingent payment clauses in construction contracts that could have enormous impact on the payment for the work that you completed under the contract:

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Pay-if Paid

This contingent payment term usually means that payment to the subcontractor is contingent on the general contractor's receipt of payment from the owner. This term is the most dangerous to the subcontractor because if it is found to be enforceable, the risk of non-payment is placed directly on the subcontractor and relieves the general contractor of the obligation to pay the subcontractor if it has not received payment from owner. While pay-if-paid clauses are enforceable in Texas, courts will look for a reason to invalidate this clause and the contract must contain very specific language to be upheld.

Pay-When-Paid

This contingent payment term usually contains language that allows the general contractor to withhold payment to subcontractors until they have received payment from the owner. While this clause is not as dangerous to the subcontractor as the pay-if-paid clause, it could still affect the timing of payment from the general contractor to the subcontractor. These clauses are much more commonly found in contracts than the pay-if-paid clause discussed above.

Each of these clauses could be especially dangerous to the smaller subcontractor that is dependent on prompt payment in order to keep their business running. It is these types of subcontractors that also have very little leverage against the general contractors and owners when signing a contract that might contain one of these clauses. It is important to contact an attorney that can help walk you through the statutes that govern these types of clauses which are found in the Texas Business and Commerce Code. There are very important exceptions contained in the statutes that could have an enormous impact on getting the payment due to you that an attorney would be able to walk through with you. Additionally, a subcontractor should contact an attorney that has years of experience dealing with mechanic's and materialman's liens like our firm in order to make sure these clauses cannot be used to invalidate any lien claim rights you might have once you have not been paid for your hard work. At the end of the day, it is especially important that you review every paragraph contained in any contract that you sign, specifically contracts that could have such grave consequences affecting your payments. You do not want to put yourself in this nightmare position of not receiving payment because you signed a contract that contained contingent payment clauses.

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