Pay-if-paid clauses in subcontracts are controversial. The clauses purport to shift the risk of owner nonpayment from the prime contractor to the sub. The prime is obligated to pay the subcontractor only if the prime receives payment from the project owner for the sub’s work. The subcontractor, who contracted only with the prime, is at the mercy of the owner’s solvency and creditworthiness.
This issue played out recently in a design subcontract. An agreement between an architect and an engineering consultant, on an AIA form, said “the Architect shall pay the Consultant in proportion to amounts received from the Owner.” An Ohio court interpreted this as a pay-when-paid clause, not a pay-if-paid clause. The ultimate risk of project owner nonpayment was not shifted to the engineering consultant. When the owner canceled the project and failed to pay the architect, the architect still had to pay its consultant.
How do you feel about this issue? Should subcontractors share in the risk of owner nonpayment? From a subcontractor’s standpoint, would you sign an agreement which expressly assigned that risk to you? From a prime contractor’s point of view, are you comfortable trying to pass that risk through to your subs? I welcome your comments.
Featured in Next Week’s Construction Claims Advisor:
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