On numerous occasions, I have discussed the need to be careful with so called “pay if paid” clauses in construction contracts. While such clauses are enforceable in Virginia (when phrased correctly), there are exceptions and limitations (for instance in the Miller Act context).
One such exception (that I frankly would have thought to be obvious) is that such clauses do not protect a general contractor from paying all subcontractors. Such a clause only protects a general contractor from payment to those subs for whose work the general contractor has not been paid. In other words, if a general contractor has been paid by an owner for a particular subcontractors work, it cannot use the pay if paid clause to deny payment even in the event that other subcontractors were deficient in their work or the owner has failed to pay the general contractor in full.
In Precision Contractors Inc. v. Masterbuilt Companies Inc. (PDF) the Fairfax, VA Circuit Court reiterated this principal stating that nothing in the contract suggests that either party to the lawsuit had any intention to shift the risk of non-payment by the owner or non-performance of other subcontractors to the plaintiff (Precision).
While this may seem obvious, the more interesting question in my mind is whether the Court would have enforced a provision in the contract that in fact shifted all of the risk downhill in the manner described above. We are in Virginia where the contract is king so I’m not sure that such a clause, correctly drafted, would not be enforced. Fairness would dictate that a performing subcontractor should not bear the weight of poor or untimely performance by its fellow subcontractors, but subcontractors must be wary of contractual language that may make them do just that.
The Fairfax court restated what we all would think is the law, however, it left the door open to enforcing some strongly pro-general contractor language in contracts. For this reason, whether you’re a subcontractor, supplier, or general contractor, you should consult with an experienced Virginia construction lawyer in order to protect your interests.
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