"Pay-when-paid" construction contract requirement: bane of the subcontractor's existence.

• Author: Hollander, Howard J.
• Position: Florida

Increasingly, subcontractors are finding it more difficult to cope with the ever-present and potentially fatal "pay-when-paid" provision in their agreements with general contractors. Much has been written about this contract clause by jurists and others whose day-to-day contact with the life of a construction project and the travails of the small/medium sized subcontractor is extremely limited.

This author proposes to dispel some myths and suggest some solutions to this vexing problem facing subcontractors whose fear of "losing business" overcomes their. natural instinct to "stay in business." First, however, the historical perspective should be reviewed against a background of misunderstanding more often perpetuated by those with law diplomas in their hands rather than shovels.

Out of Touch

Unfortunately, the Florida Supreme Court gave impetus to the continuing vitality of the "pay-when-paid" provision by underplaying the significance of a contractual covenant that essentially deprives the subcontractor of payment solely because the general contractor chose to do business with a recalcitrant owner. In Peacock Construction Co. v. Modern Air Conditioning, Inc., 353 So. 2d 840 (Fla. 1977), the Supreme Court without the benefit of any statistical data or supporting evidence concluded:

If an issue of contract interpretation concerns the intention of the parties, that intention may be determined from the written contract, as a matter of law, when the nature of the transaction lends itself to judicial interpretation. A number of courts, with whom we agree, have recognized that contracts between small subcontractors and general contractors on large construction projects are such transactions. Cf. Thos. J. Dyer Co. v. Bishop International Engineering Co., 6 Cir., 303 F.2d 655 (1965). The reason is that the relationship between the parties is a common one and usually their intent will not differ from transaction to transaction, although it may be differently expressed.

That intent in most cases is that payment by the owner to the general contractor is not a condition precedent to the general contractor's duty to pay the subcontractors. This is because small subcontractors, who must have payment for their work in order to remain in business, will not ordinarily assume the risk of the owner's failure to pay the general contractor.

The court's assumptions were wrong for two reasons. First, the "intent" of this risk-shifting provision is to free the...