Florida Construction Law: ‘Pay-if-Paid’ and ‘Pay-when-Paid’ Clauses Explained

The construction industry is more complex than it has ever been. In the modern business world, most large and mid-sized construction projects must be completed by several different contractors and subcontractors. Notably, payment for a construction project often flows downstream. This means that the primary contractor actually gets paid, and then, in turn, pays subcontractors.

However, all too often, payment for a construction project is not smooth. Subcontractors, who are often at the end of the payment line, are generally left in the most precarious position. This is especially true if your subcontracting firm has signed a  ‘pay-if-paid’ contract or a ‘pay-when-paid’ contract. Here, our West Palm Beach construction law attorneys explain what you need to know about these type of relatively common contract provisions.

What is ‘Pay-if-Paid’?

A ‘pay-if-paid’ contract puts the subcontractor in a disadvantaged position. Under this type of clause, the contractor has no obligation to provide payment to a subcontractor unless and until their firm receives payment from the project owner. This has major implications for subcontractors, as the provision explicitly seeks to shift the full risk of nonpayment (or delayed payment) onto the subcontractor.

What is ‘Pay when Paid’?

A ‘pay-when-paid’ contract clause is relatively similar, but it also has an important difference. With this type contract language, all of the risk is not necessarily shifted onto the subcontractor. Indeed, this clause is a timing mechanism. So, if a subcontractor signed a ‘pay-when-paid’ provision, but the project owner never paid, the subcontractor would actually still have a legal right to take action against the primary contractor.

Know What is In Your Contract

On a surface level, these provisions sound quite similar, but in practice different contract provisions will lead to very different results should a problem arise. A construction company, whether it is a contractor or a subcontractor, needs to ensure that it has negotiated contracts that are truly in its best interests. This is critically important as the risk of project owner nonpayment or delayed payment is a major issue in Florida construction. Your business needs to be protected so that the risks do not unfairly fall on you.

Risk-Shifting Provisions Must Be Unambiguous

In the 1990 case of DEC Electric, Inc. v. Raphael Construction Corp., the Supreme Court of Florida made it clear that risk-shifting provisions are permissible in Florida construction contracts. Though, to be enforceable, the contract must be clear and unambiguous. In the event that there is ambiguity in the meaning of the contract, the agreement will be interpreted in the manner that benefits the subcontractor. Florida courts believe that primary contractors are in an inherently superior bargaining position, and, as such, they have placed the burden of drafting a clear contract on primary contractors.

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At Pike & Lustig, LLP, our team has extensive experience handling all aspects of Florida construction law. If your company is involved construction litigation, we are ready to help. From our offices in West Palm Beach, Wellington and Miami, we represent firms throughout South Florida, including in Coral Springs, Pompano Beach and Oakland Park.

Resource:

leagle.com/decision/1990985558So2d427_1855/DEC%20ELEC.,%20INC.%20v.%20RAPHAEL%20CONST.%20CORP.