November 2009

In this edition of Law and Mortar, the construction industry newsletter from Venzie, Phillips & Warshawer, we discuss the difference between two types of payment clauses commonly seen in construction contracts.

Our newsletter is intended to be a source of information relating to the management of construction contracts, risks and business practices for our clients, friends and others doing business in the construction industry. Please note the disclaimer below regarding the general content of this newsletter.

“Pay-If-Paid” versus “Pay-When-Paid” Clauses:  There Is a Significant and Important Difference


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In the recent case of Sloan Company v. Liberty Mutual Insurance Co., the United States District Court for the Eastern District of Pennsylvania issued an opinion analyzing whether the final payment clause in a subcontract between the general contractor, Shoemaker Construction Co., and its subcontractor, Sloan Company, was a “pay-if-paid” or a “pay-when-paid” clause.  The case involved a large condominium construction project whereby Shoemaker refused to make final payment to Sloan on the grounds that it had not received final payment from the owner. 

According to the court, a “pay-if-paid” clause in a subcontract has the effect of shifting the risk of non-payment by the owner from the contractor to the subcontractor.  In other words, under a “pay-if-paid” clause, a subcontractor is only entitled to payment from the contractor if the contractor receives payment from the owner.  If the owner does not pay the contractor, the subcontractor is not entitled to payment from the contractor and will not be able to recover payment from the contractor in any legal proceeding.  A “pay-if-paid” clause gives the contractor a legal defense to any claim by the subcontractor for payment.

On the other hand, a “pay-when-paid” clause does not shift the risk of non-payment by the owner from the contractor to the subcontractor.  A “pay-when-paid” clause is merely a timing mechanism for the contractor’s payment to the subcontractor, generally permitting the contractor to delay making payment to the subcontractor until it receives payment from the owner.  The important difference being that under a “pay-when-paid” clause, if the contractor never receives payment from the owner, the subcontractor is still entitled to payment from the contractor for work performed and can enforce its right to payment through the legal process if forced to do so.  A “pay-when-paid” clause does not provide the contractor with a legal defense to its obligation to pay the subcontractor for work performed.   

Wording of Clause Determines the Difference

In Sloan, the court stated that determining whether a subcontract contains a “pay-if-paid” or a “pay-when-paid” clause “requires a careful analysis of the contractual language.”  If the parties intend for a payment clause to be a “pay-if-paid” clause, then strong and clear language must be used to express the intent to shift the risk of non-payment by the owner from the contractor to the subcontractor.  Merely stating that receipt of payment from the owner is a “condition precedent” to the contractor’s obligation to pay the subcontractor is probably not sufficient.  If the language used does not clearly indicate an intent to shift the risk of non-payment to the subcontractor, then the clause will be considered a “pay-when-paid” clause.

Result reached by the Court in Sloan

Even though the final payment clause said that Shoemaker’s receipt of final payment from the owner was a “condition precedent” to Shoemaker’s obligation to make final payment to Sloan, the court found that the language in the Shoemaker-Sloan subcontract was not sufficient to indicate that the parties intended to shift the risk of non-payment by the owner from Shoemaker to Sloan.  Therefore, the court concluded that the subcontract contained a “pay-when-paid” clause and entered judgment for Sloan for the undisputed portion of Sloan’s subcontract balance.

For a copy of the court's opinion in Sloan, click here.

Submittals: Strictly adhere to the required contract procedure for the submission of shop drawings, product data, samples and other required submittals.  This includes using the required submittal format, mode of transmission, number of copies, submission to the proper person, etc.  In addition, don’t proceed without the review and/or approval of the design professional that is required by the contract documents.  Also, document any field events that could effect the quality of the product or work performed.


VP&W Bulletin Board

1. On September 24, 2009, Kevin G. Amadio, Esq. spoke to higher education real estate and construction lawyers on surety bond drafting issues at the seventh annual Higher Education Real Estate Lawyers (HEREL) Conference in Las Vegas, Nevada. For more information about this conference, click here.

   

Venzie, Phillips and Warshawer is a proud member of the following industry associations:

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An E-Newsletter From
Venzie, Phillips & Warshawer
For the Construction Industry

Editors

 Jeffrey C. Venzie, Esq.
 Stephen A. Venzie, Esq.
 Howard D. Venzie, Jr., Esq.

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Venzie, Phillips & Warshawer is a law firm located in Philadelphia, Pennsylvania serving all facets of the construction and surety bond industries since 1975. The firm engages in both the prosecution and defense of construction contract and other commercial litigation before the state and federal courts in the Commonwealth of Pennsylvania and the State of New Jersey, as well as those of other jurisdictions, and has substantial experience in the arbitration and mediation of construction industry claims and disputes before the American Arbitration Association and in the settlement of such claims and disputes through various forms of Alternative Dispute Resolution.

Recent Headlines

RLI Insurance Co. v. Indian River School District, 556 F.Supp.2d 356 (D.Del. 2008) is the first reported case applying Delaware’s procurement law to restrict the surety’s defenses under a performance bond on a public works project.  In granting the public owner’s motion for partial summary judgment, the Court held that because Delaware’s procurement law restricted the surety from raising defenses not provided in that law, the surety was barred from raising as a defense the requirement found in the AIA 312 performance bond for a pre-default conference.  The Court further held that the same procurement law provision barred the surety from asserting as defenses that the public owner breached a duty to notify the surety about problems with the contractor’s performance or a duty to withhold payments to the contractor that might impair the surety’s collateral.  The Court also ruled that the public owner acted within its rights by making payments to the contractor in the amounts certified by the construction manger and architect and that the surety could assert no overpayment defense based on any such payments made in good faith.  Kevin G. Amadio, Esq. of our office represented the public owner in this case.

For a copy of the court's opinion, click here.

If you have any questions please email Kevin G. Amadio, Esq. at kamadio@venzie.com or Stephen A. Venzie, Esq. at svenzie@venzie.com

 

 

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