Quick Note: Be Careful with Pay if Paid Clauses (Both Subcontractors and General Contractors) (now with a caveat)

Aside from waiver of lien rights (something that will be illegal in Virginia after July 1, 2015), the most troublesome contractual impediment to payment for a subcontractor or supplier on a project often is the “pay if paid” clause.  As a general rule, in Virginia, these clauses where drafted in the proper fashion, are enforceable.  As I have said many times, in Virginia freedom of contract almost always wins out.

While this is the case, I emphasize that such clauses must be very explicit and specific.  Furthermore, and in something that should be obvious, these clauses are generally limited by the Courts of Virginia to only be enforceable and to only forgive the need for payment if the upstream contractor on the construction job has not been paid for the work that the sub claiming nonpayment has done.

What does an enforceable pay if paid (as opposed to “pay when paid”) clause look like?  It makes the payment by the Owner an explicit condition precedent to payment (thanks to Matt Devries (@matthewdevries) for his insights on this point).  It cannot be at all ambiguous and must essentially state that a subcontractor cannot get paid unless and until the general contractor gets paid, no ifs, ands or buts.

In short, the assistance of an experienced Virginia construction lawyer is essential when drafting or faced with such a clause in order to determine what if any action should be taken relating so such a clause and its enforceability.

NOTE:  These clauses are in the crosshairs of the Virginia General Assembly and a bill to ban such clauses is on Governor Youngkin’s desk for signature.  Read my thoughts on this new legislation here.

As always, I welcome and encourage your comments below, please share your thoughts.  Also, please subscribe to keep up with the latest Construction Law Musings.