“Pay-if-paid” clauses in subcontracts purport to shift the risk of project owner nonpayment from the prime contractor to the subcontractor. If drafted carefully, with express “condition precedent” language, they are enforceable in most (but not all) jurisdictions. The clauses, however, are understandably resented by trade contractors. The prime or general contractor elected to do business with the project owner and had the opportunity to ascertain the financial capability of that owner? Why should a subcontractor, which contracted only with the prime, be asked to assume the risk of owner insolvency?
In a recent federal appeals court decision, an enforceable pay-if-paid clause in a subcontract had been modified. If the prime contractor did not receive final payment from the owner within six months of the date due, the prime would pursue payment remedies against the owner and make a pro rata distribution of any recovery to the unpaid subcontractors. The subcontractor in question still received only a fraction of the subcontract balance. But the risk of owner insolvency was at least shared by the prime, which disbursed the full settlement amount to its subs.
A risk sharing arrangement, such as the one described above, may be a reasonable compromise. How do you feel about pay-if-paid clauses? Should a prime contractor assume all the risk of project owner insolvency? Or is it fair to pass that risk through to the subcontractors as a cost of doing business?
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