Pay-when-paid (also known as pay-if-paid) provisions are customary in subcontract agreements. These provisions provide that the contractor must be paid by the owner for the subcontractor’s work as an express condition precedent to the contractor’s payment to the subcontractor. Thus, if the contractor does not get paid by the owner, the subcontractor does not get paid by the contractor. This is a must-include provision to contractors as it shifts the risk of the owner’s nonpayment to the subcontractor.
However, on public projects and even many large-scale private projects, the contractor is required to obtain a payment bond that guarantees the contractor’s payment to subcontractors. Importantly, the pay-when-paid language does not protect a payment bond surety; it is not a defense to a payment bond surety. See OBS Co., Inc. v. Pace Construction Corp., 558 So.2d 404 (Fla. 1990) (finding that pay-when-paid language in subcontract does not prevent subcontractor from suing payment bond); see also Everett Painting Co. v. Padula& Wadsworth Const., Inc., 856 So.2d 1059, 1061 (Fla. 4th DCA 2003) (“However, this [pay-when-paid] contract provision is not a defense that is available to Surety.”).
From a subcontractor’s perspective, it is important on the front-end to know whether a payment bond is in place and, if so, what steps need to be taken to preserve a payment bond claim in the event of nonpayment. If there is any concern as to whether the general contractor was paid by the owner, it may be advisable to pursue the payment bond directly (instead of the contractor) unless there are reasons not too such as issues with the subcontractor’s compliance with statutory conditions precedent to sue on the bond. (Also, if there are concerns with the venue provision in the subcontract, pursuing a claim against the bond may create an argument to sue in a venue outside of the venue provision in the subcontract.)
From the general contractor’s perspective, if there is a payment bond in place, it needs to appreciate that the pay-when-paid defense will not apply to its surety. One thought is to include a provision in the subcontract that references that the subcontractor understands that the surety is an intended-third party beneficiary of pay-when-paid language and can utilize the pay-when-paid defense in the event the general contractor is not paid for the subcontractor’s work. There is, however, a strong argument that this language would not be enforceable based on caselaw set forth above that does not allow a surety to benefit from the pay-when-paid defense. The leading Florida Supreme Court case, OBS Co. (cited above), that finds that a surety cannot benefit from this pay-when-paid defense, states:
“The payment bond is a separate agreement, and any inability to proceed against the general contractor does not necessarily prevent recovery against the sureties under the bond. In this case recovery under the payment bond is in no way conditioned on the owner making final payment to Pace [general contractor]. Nor does the bond incorporate the payment terms of the subcontract.”
Based on that bolded language, it is an uphill battle to create an argument that the surety can be protected by the pay-when-paid defense because the payment bond does not incorporate each and every subcontract and such language would merely turn the bond into a conditional payment bond, i.e., a bond conditioned on the owner’s payment to the contractor. Including language in the subcontract that says the surety is an intended third-party beneficiary of the pay-when-paid language is definitely a tough sell, but it has little downside, as the worst that happens is that the pay-when-paid defense does not apply to claims against the surety no matter what, which is likely the case.
Notably, it is advisable for the general contractor to include language in subcontracts that provides to the extent the pay-when-paid provision conflicts with language in the prime contract, the pay-when-paid language shall govern. The reason being is to avoid any argument that the pay-when-paid language is ambiguous because it conflicts with language in the prime contract (that is incorporated into the subcontract) which would not have a pay-when-paid provision.
For motion information on pay-when-paid provisions, please see: http://www.floridaconstructionlegalupdates.com/careful-drafting-of-pay-when-paid-provisions/
Please contact David Adelstein at email@example.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.