Most contractors are likely aware of “pay if paid” and “pay when paid” payment terms; however, the meaning of those terms and the language used to draft those clauses are often not fully understood. Those two payment terms have entirely different meanings, with one shifting the risk of non-payment by the owner to the subcontractor.
A "pay when paid" clause establishes a timing mechanism for payment and generally will not excuse the prime contractor from its obligation of having to pay its subcontractor, regardless of whether the owner has paid the prime contractor.
In contrast, a "pay if paid" clause establishes payment from the owner as a condition precedent for payment from the prime contractor to its subcontractor. A condition precedent is an event that must occur before a party to a contract must perform or do their part. Stated another way, a “pay-if-paid” clause provides that a prime contractor is not required to pay its subcontractor unless and until the prime contractor receives payment from the owner. A “pay if paid” clause excuses the prime contractor from its obligation of having to pay its subcontractor, if the owner does not pay the prime contractor.
The critical difference between these two payment terms is that the “pay if paid” clause shifts the risk of non-payment by the owner to the subcontractor. That clause accomplishes that through the use of language that creates the “condition precedent.” Sometimes a payment clause will include the term “condition precedent,” which is a clear signal that a “pay if paid” clause is intended. However, other language is sometimes used to establish the condition precedent requirement.
Understanding the difference between these two payment terms is critical to knowing whether you have agreed to payment to a subcontractor within a reasonable time after the subcontractor submits its application for payment, or whether you have agreed to the subcontractor bearing the risk of not getting paid for its work in the event the owner does not pay the prime contractor.
If you would like to discuss this issue further, please call Matthew Vanderloo at (601) 427-0065.
Disclaimer: The information and comments presented above are general in nature, are the author’s understandings for educational purposes only, and are not intended to offer a legal opinion for use in dealing with any specific set of facts or to create any attorney/client relationship. You should consult with an attorney before taking any action of a legal consequence. Further, the authority cited above is subject to change and/or re-interpretation.