"If" and "When": A subtle but important difference in contract payment terms

Payment terms are some of the most important provisions of a construction contract. Understanding each provision and, more importantly, the consequences of each provision is essential, especially for subcontractors that are relying on receiving full and timely payment (to pay their crews, lower-tier subcontractors, suppliers, etc.).

Thus, recognizing the difference between a "pay-when-paid" and "pay-if-paid" (and the implications of each) is crucial for contractors in today's sophisticated contracting environment. 

“Pay-When-Paid” vs. “Pay-If-Paid”

A “pay-when-paid” clause is a contract provision that makes payment by the general contractor to the subcontractor contingent upon the timing of the general contractor’s payment from the owner (e.g., “Subcontractor will be paid within 10 days after General Contractor receives payment from Owner”).  A “pay-when-paid” clause should be distinguished from a “pay-if-paid clause.”

A “pay-if-paid” clause is a contract provision that makes payment by the owner to the general contractor a condition precedent to the general contractor’s obligation to ever pay the subcontractor (e.g., “Subcontractor will be paid within 10 days after General Contractor receives payment from Owner and General Contractor’s receipt of payment by Owner is a condition precedent to General Contractor’s payment to Subcontractor”).

The difference (in most jurisdictions) between a “pay-when-paid” clause and a “pay-if-paid” clause is that, to create a “pay-if-paid” clause, the contract must clearly state that payment to the subcontractor by the general contractor is contingent upon receipt of payment by the owner.

How Oregon and Washington Courts Treat “Pay-When-Paid” Provisions

Most jurisdictions, including Oregon and Washington, will not allow a general contractor to withhold payment indefinitely where there is a “pay-when-paid” clause, but require that payment be made within a reasonable amount of time.  In fact, some jurisdictions have found “pay-if-paid” clauses void and unenforceable.  A few jurisdictions treat “pay-when-paid” and “pay-if-paid” clauses as having the same affect. 

The following analyzes how Washington and Oregon courts treat “pay-when-paid” clauses. Importantly, neither Oregon nor Washington courts have considered the validity of “pay-if-paid” clauses and, until they do, “pay-if-paid” clauses should be considered valid and enforceable.

            Washington

The leading case in Washington on “pay-when-paid” clauses is Amelco Electric v. Donald M. Drake Co.  In Amelco, Drake was hired to construct the King County Multipurpose Stadium.  Drake subcontracted the electrical work to Amelco.  Drake was terminated from the project for an alleged default under the prime contract.  Drake terminated its subcontract with Amelco.  The termination provision provided:

CONTRACT CANCELLATION: If the Contract between Owner and Contractor is cancelled in whole or in part through no fault of Contractor this Subcontract may be cancelled by Contractor in whole or in part without liability for damages and Contractor shall be liable to Subcontractor only for the reasonable value of Subcontractor’s work completed to the extent that Contractor has received payment for said work from Owner.

Amelco sued Drake for non-payment. Drake argued that paragraph 7(c) made receipt of payment by Drake a condition precedent to Drake’s liability to Amelco for non-payment. The Washington Court of Appeals held that subcontract term did not require Amelco to wait for payment indefinitely until Drake was paid by the owner, but rather “postponed payment for a reasonable period of time after the work was completed.”

Thus, Washington courts will construe a “pay-when-paid” clause as requiring the general contractor to pay the subcontractor within a reasonable period of time regardless of whether the contractor receives payment by the owner.

            Oregon

The leading case on “pay-when-paid” clauses in Oregon is Mignot v. Parkhill.  In Mignot, the payment provision provided that

It is fully understood by and between the parties hereto that the Contractor shall not be obligated to pay Subcontractor for any of the work until such time as Contractor has himself received the money from Bates Lumber Co.

The general contractor argued that receipt of money by it from the owner (Bates Lumber) “was a condition precedent to liability of [the general contractor].”  In analyzing the terms of the contract, the court found that a payment provision without clear and unambiguous language providing that receipt of payment by the general contractor from the owner “is merely for the purpose of fixing time” of performance and “will not be regarded as evidencing conditions precedent.”

Thus, in Oregon, a contract providing that “Subcontractor will be paid within 10 days after General Contractor receives payment from Owner” will likely be construed as fixing a time for payment and, even if the general contractor is never paid by the owner, the general contractor is still obligated to pay subcontractor within a reasonable period of time.

Understanding your contracts and, more importantly, the implications of your contract terms can make or break your success on a project. If you have questions regarding your contract rights, you should talk to an attorney specializing in construction law.