As a contractor, you are understandably concerned with being paid for your work and receiving this payment in a timely manner. Because of this, you should be aware of pay if paid or pay when paid clauses in your construction contracts. This language allows general contractors to shift the risk of non-payment by the client to you, the subcontractor.
Overview of “Pay if/when Paid” Clauses
A pay if paid or pay when paid clause is included in a construction contract to set a condition for payment. A general contractor may insert either of these provisions in a contract between his company and a subcontractor. The clause will typically stipulate that as the subcontractor, you will not receive payment for your work until the general contractor has been paid by the client. Should the client fail to pay the general contractor completely, you may never be paid for your work.
While legal, these contract clauses aren’t necessarily easy to enforce in court. In Arizona, the courts aren’t overly fond of these provisions. The contract must be well-drafted to withstand a court challenge. There are also specific case-by-case circumstances which must be applied to determine their enforceability. Legal precedent comes from the Sixth Circuit U.S. Court of Appeals in Thos. J. Dyer v. Bishop International Engineering Co. It interprets the law to place the risk of non-payment on the general contractor. However, if the contract is drafted carefully with explicit language, it is still possible for a general contractor to prove to a court that such a clause is enforceable. Precedent for this is L. Harvey Concrete v. Agro Constr. & Supply Co., 189 Ariz. 178, 181 (Ariz. Ct. App. 1997).
Arizona Prompt Pay Statute
The Arizona Prompt Payment Act is in strong opposition to these conditional payment clauses in construction contracts. The law was enacted in 2006 and amended in 2010. The law applies to private construction contracts where the project requires at least 60 days to complete. With respect to the pay if/when clause issue, it essentially states that certain professionals must be paid promptly for a job that they have performed according to an agreed-upon work contract. It specifically details that suppliers and subcontractors must receive payment from the general contractor within seven days of receipt of payment from the client. If you don’t receive payment, you may recover 18% interest along with your pending unpaid amount. This law affects the following parties:
- Licensed contractors
- Licensed subcontractors
- Material suppliers
If you have entered into a contract with a pay if paid or pay when paid clause that has resulted in nonpayment for a job you performed, contact a knowledgeable Arizona construction litigation attorney for legal counsel. An experienced lawyer may be able to apply the law to help you obtain payment from the general contractor.
Sources: https://www.asaonline.com/eweb/upload/ASA%20Contingent%20Payment%20Clauses%202012.pdf, http://www.azleg.gov/ars/32/01129-02.htm