Waiting to get paid are "pay when paid" provisions a matter of when or if?

• Author: Barthet, Patrick C.
• Position: Subcontracts - Florida

Contractors often desire to shift the risk of an owner's nonpayment to subcontractors. Shifting the risk of an owner's possible nonpayment from one party to another is neither simple nor guaranteed. Unsuspecting parties can quickly find themselves locked into an agreement containing a payment provision susceptible to conflicting interpretations. What the parties intended, and thought they understood, may in fact not be what they obtain.

For example, in J.J. Shane v. Aetna Casualty & Surety Company, 723 So.2d 302 (Fla. 3d DCA 1998), reh. den., a subcontractor found itself in the unexpected position of waiting to get paid until the party with whom it contracted was paid by the owner. The dispute involved the interpretation of the following payment provision contained in the written subcontract between the parties:

Article XIII Method of Payment

1. Subcontractor is relying upon the financial responsibility of Owner in performing the Work. It is understood by Subcontractor that payment for the work is to be made from funds received from Owner by Contractor in respect to the Work.

The subcontractor argued that the foregoing term simply fixed a reasonable time for payment by the contractor.(1) Florida's Third District Court of Appeal rejected that argument, holding instead that the subject provision plainly and unambiguously made payment by the owner a condition precedent to payment by the general contractor to the subcontractor.(2)

Pay-When-Paid Clauses Defined

Such payment provisions in construction contracts are commonly referred to as "pay-when-paid" clauses. While seemingly straightforward at first glance, many are actually ambiguous. The "pay-when-paid" language can be interpreted on the one hand as establishing a condition precedent in which payment must first be received from the owner before it can be paid out to the service provider, or, on the other hand, as simply fixing a reasonable time frame for when payment is to be made.(3) When interpreted as a condition precedent, the provider will get paid only after payment by the owner. However, when seen as fixing a reasonable time frame for payment, the "pay-when-paid" language is treated as an absolute, unconditional promise by the general contractor to pay the subcontractor, with the understanding that the payment may be delayed for some reasonable time while the general contractor obtains payment from the owner.

More often than not, a service provider who thought he or she had secured a definite promise of payment realizes too late that, in fact, no payment will be forthcoming unless the general contractor receives payment from the owner. The question is, can the intent of either party alter the individual outcome of these cases? Contrary to what one might expect, when it comes to construing these "pay-when-paid" provisions, most jurisdictions, including Florida,(4) have precluded the trier of fact from determining what the parties actually intended on a case-by-case basis.

Intent of the Parties

Ordinarily, the interpretation of a written contract is a matter of law to be determined by the court.(5) In cases in which the terms of a contract are ambiguous, however, the intention of the parties plays a pivotal role in determining which interpretation applies. In such situations, the actual intention of the parties is submitted to the jury as a question of fact.(6) Although this principle of law is applied in most situations, disputes between contractors and subcontractors over ambiguous "pay-when-paid" provisions are treated as the exception.(7) In that scenario, the question about what the parties actually intended is determined as a matter of law.(8) The explanation...