{"id":888012,"date":"2016-04-05T15:22:19","date_gmt":"2016-04-05T21:22:19","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=888012"},"modified":"2016-04-05T15:22:19","modified_gmt":"2016-04-05T21:22:19","slug":"one-word-makes-all-the-difference-the-distinction-between-pay-if-paid-and-pay-when-paid-clauses","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/one-word-makes-all-the-difference-the-distinction-between-pay-if-paid-and-pay-when-paid-clauses\/","title":{"rendered":"One Word Makes All The Difference \u2013 The Distinction Between \u201cPay If Paid\u201d and \u201cPay When Paid\u201d Clauses"},"content":{"rendered":"<p>David A. Harris | Haight Brown &amp; Bonesteel, LLP | March 30, 2016<\/p>\n<p><a href=\"https:\/\/www.myconstructionexpert.com\/blog\/my-bad-i-thought-it-was-in-good-faith-is-not-good-enough-contractor-ordered-to-pay-prompt-payment-penalties\/\" target=\"_blank\">Payment clauses<\/a> in California construction contracts are often complex and multi-layered. This is especially true in contracts between general contractors and their subcontractors. The general does not want to pay the subs until it receives funding from the owners. The subs, of course, want their progress and final payments as soon as possible.<\/p>\n<p>Up until 1997, two different payment provisions were used in California contracts to manage payments by a general to its subcontractors. The first was called a \u201c<a href=\"https:\/\/www.myconstructionexpert.com\/blog\/the-differences-between-pay-if-paid-and-pay-when-paid-clauses-in-construction-contracts\/\" target=\"_blank\">pay if paid<\/a>\u201d clause, and provided a contractor did not have to pay its subcontractors for work performed unless the subcontractor was first paid by the owner of the project. The second was the \u201c<a href=\"https:\/\/www.myconstructionexpert.com\/blog\/pay-if-paid-clauses-nasty-but-enforeceable\/\" target=\"_blank\">pay when paid clause.<\/a>\u201d It required subcontractors to be paid for their work after the general was paid by the owner, or within \u201ca reasonable time\u201d after the subcontractors finished their work if the owner did not pay the general.<\/p>\n<p>While the two clauses were frequently viewed as interchangeable, they are in fact quite different &#8211; in the \u201c<a href=\"https:\/\/www.myconstructionexpert.com\/blog\/chipping-away-at-the-armor-of-pay-if-paid-provisions\/\" target=\"_blank\">pay if paid<\/a>\u201d clause, a subcontractor is not entitled to payment unless the general contractor receives payment from the owner. In a \u201cpay when paid\u201d clause, the subcontractor must be paid, even if the general does not receive payment from the owner.<\/p>\n<p>A typical \u201cpay if paid\u201d clause provides: \u201cReceipt of payment by the Contractor from the Owner for the Subcontract Work is a condition precedent to payment by the Contractor to the Subcontractor. The Subcontractor hereby acknowledges that it relies on the credit of the Owner, not the Contractor, for payment of Subcontract Work.\u201d (ConsensusDocs Standard Agreement 655 [now retired].)<\/p>\n<p>A \u201c<strong>pay if paid<\/strong>\u201d clause creates a condition precedent for payment to the subcontractor. Unless the general contractor is paid by the owner, the general contractor has no obligation to pay a subcontractor for its work. As such, the clause essentially transfers the risk of non-payment by the owner from the general contractor to the subcontractor.<\/p>\n<p>By contrast, a \u201cpay when paid\u201d clause is a \u201ctiming mechanism\u201d as to when payment will be made. A typical \u201cpay when paid\u201d clause provides: \u201cProgress payments to the Subcontractor for satisfactory performance of the Subcontract Work shall be made no later than seven (7) Days after receipt by the Contractor of payment from the Owner for the Subcontract Work. If payment from the Owner for such Subcontract Work is not received by the Contractor, through no fault of the Subcontractor, the Contractor will make payment to the Subcontractor within a reasonable time for the Subcontract Work satisfactorily performed.\u201d (ConsensusDocs Standard Agreement 750.)<\/p>\n<p>A \u201c<strong>pay when paid<\/strong>\u201d clause creates an unconditional promise that subcontractors will eventually be paid, and does not shift the risk of non-payment.<\/p>\n<p>While both clauses are currently in use in <a href=\"https:\/\/www.myconstructionexpert.com\/blog\/what-is-a-pay-if-paid-contract-clause-and-can-it-apply-to-a-construction-subcontractor\/\" target=\"_blank\">contracts<\/a> in many states, \u201cpay if paid\u201d clauses are unenforceable in the State of California.<\/p>\n<p>In Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal.4th 882 the California Supreme Court held pay if paid clauses were against public policy. The Court held \u201cpay if paid\u201d clauses act as an indirect waiver of a subcontractor\u2019s mechanic\u2019s liens rights in violation of former Civil Code section 3262 (now Civil Code section 8122). Section 3262 held that contracts which \u201cwaive, affect, or impair\u201d a claimant\u2019s right to a mechanic\u2019s lien are \u201cnull, void and unenforceable.\u201d The court reasoned the \u201cpay if paid\u201d clause was \u201cin substance a waiver of mechanic&#8217;s lien rights because it has the same practical effect as an express waiver of those rights.\u201d Since nothing was \u201cdue\u201d a subcontractor unless the owner paid the general contractor, the subcontractor had no right to file a lien to protect its right to payment.<\/p>\n<p>By contrast, \u201cpay when paid\u201d clauses are enforceable if the subcontractor is paid within a reasonable period of time after its work is completed. Yamanishi v. Bailey &amp; Collishaw, Inc. (1972) 29 Cal.App.3d 457. Under Yamanishi, a general contractor may avoid paying subcontractors for a period of time while it seeks payment from the owner. The key is that payment from the owner to the general contractor is not a condition precedent to the subcontractor. The general contractor must pay the subcontractor whether or not it receives payment from the owner. (cf Capital Steel Fabricators, Inc. v. Mega Construction Co. (1997) 58 Cal.App.4th 1052 holding a pay when paid clause that acted as a condition precedent to payment as unenforceable.)<\/p>\n<p>Unfortunately, there are no reported California cases identifying what constitutes a \u201creasonable\u201d time period for payment by the general contractor to the subcontractor. This is true as well for the few unpublished cases which have considered the issue. See, i.e., Sampson v. Richardson Group 2013 Cal.App. Unpub. LEXIS 751: \u201cThe Civil Code bars the parties to construction contracts from limiting a contractor or subcontractor\u2019s right to payment through the use of a \u201c<a href=\"https:\/\/www.myconstructionexpert.com\/blog\/is-it-the-dawning-of-the-age-of-strict-products-liability-for-contractors-in-california\/\" target=\"_blank\">pay if paid<\/a>\u201d clause. (Citations omitted.) However, this rule does not apply where a contract provision limiting a subcontractor\u2019s right to payment is construed \u2018as merely fixing the usual time for payment to the subcontractor, with the implied understanding that the subcontractor in any event has an unconditional right to payment within a reasonable time.\u2019 [Citations].\u201d See also, Interior Partitions, Inc. v. Bay Commerc. Constr., Inc. 2003 Cal.App. Unpub. LEXIS 10240: \u201cA \u2018pay when paid\u2019 provision posits that the subcontractor will get paid when the general contractor is paid by the owner for the subcontractor\u2019s work, so long as payment to the subcontractor will occur within a reasonable period. . . .\u201d (Emphasis added.)<\/p>\n<p>The unanswered question, therefore, for both general contractors and subcontractors is&#8230;<\/p>\n<p><a href=\"http:\/\/www.hbblaw.com\/Construction-Advisory-One-Word-Makes-All-The-Difference--The-Distinction-Between-Pay-If-Paid-and-Pay-When-Paid-Clauses-03-30-2016\/\" target=\"_blank\">To finish reading this article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>David A. Harris | Haight Brown &amp; Bonesteel, LLP | March 30, 2016 Payment clauses in California construction contracts are often complex and multi-layered. This is especially true in contracts between general contractors and their subcontractors. The general does not want to pay the subs until it receives funding from the owners. The subs, of&hellip; <a class=\"more-link\" href=\"https:\/\/www.myconstructionexpert.com\/blog\/one-word-makes-all-the-difference-the-distinction-between-pay-if-paid-and-pay-when-paid-clauses\/\">Continue reading <span class=\"screen-reader-text\">One Word Makes All The Difference \u2013 The Distinction Between \u201cPay If Paid\u201d and \u201cPay When Paid\u201d Clauses<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[9],"tags":[72,289,290,9158],"class_list":["post-888012","post","type-post","status-publish","format-standard","hentry","category-construction-contracts","tag-construction-contracts-2","tag-pay-if-paid","tag-pay-when-paid","tag-payment-clause","entry"],"jetpack_publicize_connections":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>One Word Makes All The Difference \u2013 The Distinction Between \u201cPay If Paid\u201d and \u201cPay When Paid\u201d Clauses - Advise &amp; 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