A “Pay-if-Paid” provision, to a much greater degree than the related “Pay-when-Paid” provision, is an often-controversial contingent payment clause that makes payment to a downstream contractor or supplier expressly contingent on receipt of payment by the higher tier entity. For example, a subcontractor subject to a pay-if-paid clause is not entitled to payment whatsoever from the prime contractor unless and until that prime contractor receives payment from the project owner.
Florida does permit pay-if-paid clauses, but the contract must be very clear that payment is contingent on payment. If the intent to shift the risk to the downstream party is not expressly clear, the Supreme Court of Florida has held since 1978 in Aetna Casualty & Surety Co. v. Warren Bros. Co., 355 So.2d 785 (Fla. 1978) that if the provision is not clear, then the payor party must make payment in a reasonable time. In effect, the court will read the provision as a “pay-when-paid” clause which merely fixes a time for payment rather than establishes entitlement to payment. Thus, the drafting party should use magic words such as “contingent upon and subject to” or “condition precedent” to clearly indicate that the payee is not entitled to payment unless and until the payor receives the funds itself.
Even when the “magic words” are used, however, does not mean that the provision necessarily must survive. While Florida law permits pay-if-paid provisions, the state’s courts are often loath to enforce them, searching for justification to convert them into pay-when-paid provisions. Justification for such a reading need not come from the text of the provision itself, but any conflicting provision in the contract or related documents. For example, often, a project’s subcontracts will incorporate by reference the terms of the prime contract, and if that agreement mandates that the prime contractor pay its subs in order to receive payment from the owner or contains another restriction of the prime contractor’s payment provisions, the subcontract pay-if-paid provision may fail.
In the end, a pay-if-paid provision in a Florida construction contract may well be enforceable, but it must be carefully and clearly drafted and it does not exist in isolation. Otherwise, a prime contractor could find itself relying on a provision that offers no support.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.
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