If and when … Though both words contain few letters, each carries significant meaning, especially when used in a subcontractor agreement. Whether you are a general contractor in New York or are a subcontractor, you have a responsibility to yourself, your employees and your business to review the terms of your contract and ensure none of the provisions will leave you high and dry when it comes time to get paid.
Contingent payment clause
It is not uncommon for subcontractor agreements to contain contingent payment provisions. A contingent payment clause informs the scheduling of payments from the general contractor to the subcontractor. It also dictates whether or not the GC has an obligation to pay the sub. Contingent payment stipulations typically fall into one of two categories: “Pay when paid” and “pay if paid.” Though the two appear to say the same thing, a contract’s specific wording can greatly influence the primary rights and responsibilities under state and local law.
Pay When Paid
According to Construct Connect, the courts tend to favor the pay when paid clause. A PWP clause does not eliminate the general contractor’s obligation to pay the subcontractor. Rather, it places a time limit on how long the GC has to pay a sub after receiving compensation from the project owner. A PWP clause does not free the general contractor from its duty to pay, even if the project owner fails to pay the prime contractor.
Pay If Paid
The pay if paid clause shifts the risk to the subcontractor. Under a PIP clause, the general contractor only has to pay the subcontractor if it receives payment. If the project owner does not pay the GC, the GC is under no obligation to submit payment to the sub.
That said, courts do not generally favor PIP provisions. The courts will typically only enforce a pay if paid clause if the language of the contract leaves no room for ambiguity. Otherwise, the courts will treat a pay if paid clause as it would a pay when paid clause.