Pay when paid clauses in construction contracts have become extremely common in the industry. Pay when paid clauses are a way by which a contractor can shift to a sub-contractor the risk of non-payment by the owner. However, not all pay when paid clauses are enforceable.  Even the ‘tightest’ pay when paid clause can be held unenforceable if it is not carefully drafted and properly applied. The fact is that pay when paid clauses must be clear and unambiguous.  But what does clear and unambiguous really mean?

Pay when paid clause must clearly state the desired shift in risk.  It must not read as fixing a reasonable time to pay. In G.E.L. Recycling v. Atlantic Envi., 821 So.2d 431 (Fla. 5 DCA 2002), the court analyzed the following pay when paid clause:

final payment will be made within 30 days after the completion of the work included in this sub-contract, written acceptance by the Architect and full payment thereof by the Owner

The court held that the above clause was susceptible to two interpretations: (1) as setting a condition precedent to payment, or (2) as fixing a reasonable time for payment. The court found that the contractual language was ambiguous and thus insufficient to shift the risk of payment failure by the owner to the subcontractor.

Florida courts have consistently held that when the intent to shift the risk of nonpayment is not clearly expressed, the payment provision must be interpreted as establishing a reasonable time to pay by the contractor rather than creating a condition precedent to the contractor's obligation to pay the subcontractor.

Practical tips:

1)  Make sure the subcontract establishes a condition precedent to payment and not just a reasonable time for payment.
2)  Read the contract terms separately and as a whole.  In other words, the rest of the contract must not contradict the pay when paid clause.
3)  Be careful when other documents are incorporated into the contract.  They might contain language that  might make a good pay when paid clause unenforceable.

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