“Pay if paid” vs. “Pay when paid” Clauses
Of the many legal issues that can arise between a contractor and its subcontractors, few are as confusing and counterintuitive as the distinction between “pay if paid” and “pay when paid” contract clauses. In daily life, these phrases have identical meanings: a contractor is limiting its obligation to pay its subcontractors until it receives payment first. Courts in Pennsylvania, however, have interpreted these seemingly identical statements in two very different ways.
It is important to understand that courts interpret “pay if paid” clauses to prevent a subcontractor from demanding payment from the contractor before the contractor has itself been paid. On the other hand, “pay when paid” clauses allow a subcontractor to seek payment from a contractor after a reasonable amount of time, even if the contractor has not itself yet received any payment.
“Express language of [a] condition is sufficient to establish a pay if paid condition precedent." C.M. Eichenlaub Co., Inc. v. Fidelity & Deposit Co. of Maryland, 437 A.2d 965, 967 (Pa.Super. 1981). In other words, merely including the phrase “pay if paid,” is not enough to create a contract which fully protects a contractor. Courts have assigned the label “pay if paid” to those contracts that clearly indicate to the subcontractor that their right to receive any payment is conditioned on the contractor first receiving payment. Phrases like “if and only if,” “only after,” and “unless and until” are indicators which a court relies on when determining the rights of the contractor and subcontractor.
Courts label contract payment clauses as “pay when paid” when the contract does not include conditional language. A “pay-when-paid clause does not establish a condition precedent, but merely creates a timing mechanism for the general contractor’s payment to the subcontractor.” United Plate Glass Co. Div. of Chromalloy Am. Corp. v. Metal Trims Industries, Inc., 525 A.2d 468, 471 (Pa.Cmwlth. 1987)). This leaves the door open for subcontractors to compel payment from the contractor, even if the contractor has not yet received payment from the completed work.
Pennsylvania courts tend to interpret a payment clause as “pay when paid” anytime the language of the contract does not clearly indicate it has a “pay if paid” clause. Therefore, contractors are well served to review their subcontractor agreements and ensure the proper language is present to prevent subcontractors from demanding payment before the contractors have themselves been paid.