Chapter 17 - § 17.4 • PAYMENT ISSUES
| Jurisdiction | Colorado |
§ 17.4.1-Introduction
Important money clauses in construction contracts deal with the time for and amount of payments, withholding payments, payments for extras, payments on account of differing or changed conditions, and security for payment.
§ 17.4.2-Pay-When-Paid or Pay-if-Paid Clauses
Who bears the risk of non-payment by a construction project owner: the contractor or project subcontractors? Naturally, neither party wants the risk, and it therefore often becomes a battle of who wins at the contracting stage.
Contractors typically propose (or require) either pay-when-paid or pay-if-paid clauses in their subcontracts. Subcontractors either (1) fail to read their subcontracts; (2) fail to recognize potential problems in contractor-drafted subcontract pay provisions; or (3) are willing to accept the risks knowing that there are not likely to be owner payment problems.
Example 1: Progress payments shall be made by Contractor seven (7) days after a corresponding payment has been received by Contractor from Owner or his or her agent. In no event shall Subcontractor be entitled to receive any payment from Contractor prior to Contractor's actual receipt of that payment from Owner on account of Subcontractor's work. Contractor's receipt of payment from Owner shall be a condition precedent to any obligation to pay Subcontractor for any portion of the Subcontract Work and Subcontractor assumes the risk of non-payment by Owner and waives all right to commence litigation for payment until said monies are received by Contractor, unless non-payment is caused solely by the negligent acts or omissions of Contractor.
Example 2: No payment under this Contract shall be considered due until five (5) days after receipt by Contractor of such payment by the Owner.
Example 1 above appears to be a pay-if-paid clause that conditions payment to the subcontractor on the contractor's receipt of payment from the owner. Courts in several jurisdictions have ruled that when payment is clearly and unambiguously conditioned upon owner payment to the contractor, the risk of non-payment falls on the subcontractor.13
In OBS Co. v. Pace Construction Corp., the same court that enforced what appeared to be a pay-if-paid clause in its ruling in DEC Electric, Inc. v. Raphael Construction Corp. found other language in the subcontract to avoid the strict application of that provision.14
Example 2 above appears to be a pay-when-paid clause. Courts have struggled over these provisions. The Colorado Supreme Court and the majority of courts of other jurisdictions have concluded that a "pay-when" provision only prescribes the time for payment, but does not condition payment to the subcontractor upon owner payment. Instead, the subcontractor gets paid by the contractor - eventually.15 The majority of courts reason that the effect of the pay-when-paid clause is to allow the contractor a reasonable time within which to obtain payment from the owner before being required to pay the subcontractor from the contractor's own funds.16
A few courts have held that the strict "condition precedent" pay-i/-paid clauses are void and unenforceable because they violate public policy.17 The legislatures of five states, North Carolina, Wisconsin, Illinois, Maryland, and Missouri, have enacted statutes dealing with payment clauses in construction contracts. In North Carolina, both pay-when and pay-if clauses are unenforceable. The Wisconsin statute voids pay-if clauses. The Illinois, Maryland, and Missouri statutes provide that pay-when or pay-if clauses do not afford defenses to mechanics' lien claims.
The Colorado Supreme Court decision in Main Electric, Ltd. v. Printz Services Corp.,18 in dicta, observed:
To create a pay-if-paid clause in a construction contract, the relevant contract terms must unequivocally state that the subcontractor will be paid only if the general contractor is first paid by the owner and set forth the fact that the subcontractor bears the risk of the owner's nonpayment.19
Although not entirely clear, remedies against surety bonds and under mechanics' lien statutes may be rendered unavailable by pay-when-paid or pay-if-paid subcontract provisions. The decided surety cases go both ways.20
In United States ex rel. DDC Interiors, Inc. v. Dawson Construction Co.,21 the trial court ruled that the "pay upon payment" clause was not a waiver of a...
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