Scary Contract Terms 101: Paid if Paid Contracts

Awhile back, I wrote a post explaining the Paid when Paid provisions that, unfortunately, are near ubiquitous to commercial construction contracts (Scary Contract Terms 101: Paid when Paid.)

As it turns out, however, Paid when Paid has an even scarier twin–the Paid if Paid clause.

This…is pretty much exactly what it sounds like.  If enforced, it means that if the owner doesn’t pay the general contractor, the general contractor doesn’t have to pay any subcontractors. Ever.

Yikes.

The good news is that unlike Paid when Paid, not all jurisdictions recognize Paid if Paid clauses.

Even in those that do, such clauses are typically construed pretty narrowly–after all, courts don’t like to see people go unpaid as a result of contractual agreements that they had no say in (in this case, the agreement between the owner and general contractor). As a result, generally if there is any ambiguity in the language, courts will choose to construe these clauses as Paid when Paid.

The bad news, however, is that because this is such a controversial provision, enforceability varies greatly from state to state.  If you’re working in a state like New York or California, you don’t have to worry about these clauses at all–no matter how they’re worded, they’re unenforceable!  In other states, GCs are given a pretty wide latitude in shifting the risk, and if the contract says “Paid if Paid”, there will be a whole slew of case law backing it up.

In other states yet, this clause creates a huge grey area due to conflicting case law, precise requirements for wording, and/or a complete lack of precedent.

As a result, there’s no way to give contractors easy answers on what to do when encountering Paid if Paid contracts.

…………

If you do all of your work in the same state, it might be wise to do a little research on your particular state’s laws. A couple of hours and/or a few hundred dollars spent talking to a construction lawyer now will probably be well worth the investment, since this is an issue you may be encountering another 30 times over the next decade.

On the other hand,  if you’re like a lot of commercial contractors, you may be doing work in five or six different states at a time. In that scenario, ultimately, all you can do is run a risk-benefit analysis:  How much will it hurt if you don’t get paid?

For a quick $3k job with good margins, you might feel like jumping right in and taking the risk.  It’s a little scary, but at the end of the day, it’s an absorbable loss if anything goes wrong.  For a $1.5M job with good margins, you should take the time and money to research what that state’s laws are before proceeding. And, if we’re talking about a $200k job that already has a 2% profit margin? Just, no.

In fact, quit placing those bids all together.