Pay-If-Paid Not Easily Waived

June 27, 2014 — 2,328 views  

Challenging economic times and a shaky housing market have exposed increasing numbers of contractors and subcontractors to the harsh reality of nonpayment. Because most contracts and subcontractors run their own businesses or run an exceedingly small operation, the loss of payment from work rendered can lead to substantial hardship. This hardship is only magnified when professional contracting groups engage in a pay-if-paid scenario. In contrast to pay-when-paid clauses, this agreement in a contract notes that the subcontractor will only be paid by the supervising contractor if the client renders full payment for the services provided. If no payment is issued, or if a partial payment is issued to the contractor, they may withhold all of that money from the subcontractor until they're given the full sum by the client at a later time.

This shift of liability to the subcontractor has been controversial since the very beginning, and both state legislatures and the courts have looked into whether waivers are legal and enforceable, whether the clause itself is enforceable, and whether or not it's an ethical way to do business between contracting and subcontracting groups. The result has been decidedly mixed, historically, but a new court ruling in a Georgia case, handed down by an appellate court, might have even more wide-ranging effects if it advances further through the federal system.

A Look at the Outcome of Vratsinas Construction Co. v. Triad Drywall

Originally filed in a Georgia trial court, Vratsinas Construction Co. v. Triad Drywall proved to be a favorable case for a subcontractor. In this case, the subcontractor was working within a pay-if-paid clause, but was receiving periodic payments from the contractor for ongoing work that lasted more than a year. Those payments, of course, were dependent on the client first paying the contractor. Payment for the work soon stopped, and the subcontractor logically stopped receiving payment as well. They sued under the assumption that the periodic payments constituted a de facto waiver of the pay-if-paid clause, and a jury agreed.

The appellate case, however, did not go very well for that subcontractor. The jury's verdict was overturned, with the court noting that incremental payments to the subcontractor did not constitute an effective waiver of pay-if-paid, since it was made clear that payments would be given to the subcontractor only if they were first received from the client and purchased by the contractor. Because no documentation was authored or signed that indicated a waiver was in effect, the subcontractor would have to forego any payments for their work rendered until the client paid the sum owed on the outstanding balance.

A Lesson in Minding the Finer Print of Construction Contracts

It's getting increasingly hard for contractors and subcontractors to prove that a pay-if-paid waiver was in effect at any point during their construction work. Amid increasingly harsh state legislation and unforgiving court verdicts, construction professionals in today's business climate would be wise to read over every word of their contracts and, if they require or receive a pay-if-paid waiver, they should make sure that any such agreement is written, signed, and notarized, so that it stands up to scrutiny in a courtroom or legal environment.