What Are ‘Pay-If-Paid’ and ‘Pay-When-Paid’ Clauses in Florida Construction Contracts?

In the construction industry, payment disputes are a common challenge that contractors and subcontractors face. To manage these risks, general contractors often include “Pay-If-Paid” and “Pay-When-Paid” clauses in their contracts. These clauses determine when and how subcontractors get paid, but they carry significant legal and financial implications. Understanding the differences between them and how Florida courts enforce them is crucial for protecting your business, that is where Bleakley Bavol Denman & Grace come in.

What Is a Pay-If-Paid Clause?

A Pay-If-Paid clause makes a general contractor’s obligation to pay subcontractors contingent upon the contractor first receiving payment from the project owner. In other words, if the contractor does not get paid by the owner, the subcontractor does not get paid either. This type of clause effectively shifts the risk of nonpayment from the contractor to the subcontractor.

Are Pay-If-Paid Clauses Enforceable in Florida?

Yes, but only under strict conditions. Florida courts have held that Pay-If-Paid clauses must contain clear and unambiguous language stating that the subcontractor assumes the risk of nonpayment. If the clause is vague, courts will interpret it as a Pay-When-Paid clause (which is less restrictive).

For example, in DEC Electric, Inc. v. Raphael Construction Corp., the Florida Supreme Court ruled that a Pay-If-Paid clause must expressly state that payment to the subcontractor is expressly conditioned upon the contractor receiving payment. Without this explicit language, courts presume that the clause only affects the timing of payment—not the subcontractor’s right to be paid.

Risks of Pay-If-Paid Clauses for Subcontractors

• Higher risk of nonpayment if the owner defaults or refuses to pay.
• Limited legal recourse since subcontractors may have waived their right to payment if the clause is enforceable.
• Possible challenges in financing or cash flow if payments are uncertain.

How Subcontractors Can Protect Themselves

• Negotiate contract terms to replace a Pay-If-Paid clause with a Pay-When-Paid clause.
• Request payment bonds on public projects to secure alternative payment options.
• File a mechanic’s lien if payment issues arise (as long as lien rights are not contractually waived).

What Is a Pay-When-Paid Clause?

A Pay-When-Paid clause dictates the timing of payment but does not eliminate the contractor’s obligation to pay a subcontractor. This means that if the contractor does not receive payment from the owner, they must still pay the subcontractor within a reasonable period.

Are Pay-When-Paid Clauses Enforceable in Florida?

Yes. Florida courts recognize Pay-When-Paid clauses as a timing mechanism rather than a waiver of payment. Courts have ruled that subcontractors must be paid within a “reasonable time,” even if the contractor never receives payment from the owner.

Final Thoughts: Protecting Your Rights in Florida Construction Contracts

Understanding the implications of Pay-If-Paid and Pay-When-Paid clauses is essential for subcontractors and contractors alike. Subcontractors should carefully review contract terms before signing and negotiate for fairer payment provisions where possible. Contractors, on the other hand, should ensure their clauses are drafted with clear and enforceable language to avoid potential legal disputes.

If you are involved in a construction contract dispute or need assistance drafting enforceable agreements, the experienced attorneys at Bleakley Bavol Denman & Grace in Tampa are here to help. Contact our Tampa construction litigation attorneys today for a consultation.

Source:

floridabar.org/the-florida-bar-journal/are-contingent-payment-clauses-enforceable-in-florida-construction-subcontracts/