Risks regarding contingent payment and no compensation for delay clauses
“When” and “If” payment and “no damage for delay” verbiage can result in very different payment outcomes
“Contingent payment” and “no compensation for delay clauses” can be very damaging to a subcontractor who is unaware they exist within the subcontract. It’s important to read these clauses carefully, determine what is enforceable, and lobby hard not to sign these inequitable clauses.
Let’s start with defining the two types of contingent payment clauses: paid-when-paid and paid-if-paid. While both of these clauses are contingent upon payment from the owner, they have a very different meanings.
Simply put, a “paid-when-paid clause” states, “I will pay you after the owner pays me,” but does not relieve the contractor from the contractual obligation of payment. A “paid-if-paid clause” states, “I will make payment only if the owner pays me“ and attempts to relieve the contractor from the obligation of payment.
In most states, the statutes permit a “paid-when-paid” clause, allowing the contractor a reasonable time to resolve differences with the owner and obtain payment, prior to paying the subcontractors. What we should be looking for when reviewing these clause are terms relieving the contractor from the contractual obligation of payment if he is not paid. When a payment provision states the contractor and subcontractor share the risk of owner payment – or if the contractor is not paid he has no obligation to make payment – it becomes a “paid-IF-paid clause.”
The statutes regarding paid-when-paid and paid-if-paid vary by state. The American Subcontractors Association published a very informative document titled, “Contingent Payment Clauses in the 50 States.” Although it is a 2014 edition, it points us to statutory provisions and state case law.
No compensation for damages and delay clauses
Inequitable “no compensation for damages and delay clauses” have become very popular within subcontract agreements, especially the term stating, “the subcontractor will receive compensation to the extent the contractor receives compensation from the owner and an extension of time is the sole remedy for delay.” These clauses sometimes state that even if the contractor directs the subcontractor to make changes in the scope of work and the contractor does not receive payment from the owner the subcontractor will not be paid. With this statement the clause becomes a “paid-if-paid” provision.
Many subcontracts will state the subcontractor is responsible for all damages in a delay caused by the subcontractor, but the contractor has no responsibility or obligation for delay damages or compensation for any reason whatsoever. Although these provisions seem very inequitable, they will be strictly enforced as allowed by statute. As with payment provisions, the enforceability of “no damages for delay clauses” vary by state. Some states allow the enforcement of these clauses on privately funded projects but not on state-funded projects. Some states have not had a state or federal court consider the validity of a “no damage for delay” clause.
The law firm of Woods & Aitken has published a very helpful document, “Survey 50 State Matrix Pay-if-Paid / Paid-When-Paid, and No Damage for Delay.”
It’s important to understand the enforceability of these clauses in the states we perform work. In negotiating these terms, it can be helpful to point out that the provision is not enforceable in the state the work is being done and it is not a good business decision for either party to agree to a provision that is not in compliance with the statute or case law. Removing a term that is unenforceable by statute can eliminate the discussion, argument and attorney’s fees if the issue arises during the course of work.