A Catch-22: Pay When Paid Clauses Do Not Extend the Lien Period
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If you search “Pay When Paid Clauses” in Google, you’re going to get a lot of results that say a lot different things. This contractual provision – used in almost every general / sub construction contract – is perhaps one of the most confusing or misunderstood provisions out there.
Wolfe Law Group’s Construction Law Monitor recently blogged about the dangers of using one contract in multiple states. The post used the “pay when paid” provision as an example of why multi-state contracts are problematic.
The provision itself seems pretty clear: one party will get paid when the other party gets paid. It isn’t. Interpretation of this provision varies by state, with some states striking down the provision entirely as against “public policy” and other states distinguishing between “pay when paid” provisions and “pay if paid” provisions. The only way to protect your company against this tricky provision is to consult with an attorney about how these provisions are treated in your jurisdiction.
While interpretation of “pay when paid” provisions differ from state-to-state, there does appear to be one constant about this provision across the country: It doesn’t extend your lien period.
Most states require liens be filed within a certain period after you last worked on the project, or after the project is complete. The fact that you or your company is waiting for payment because the prime or an upper-tiered sub hasn’t been paid is completely irrelevant. The lien period still starts when it starts, and ends when it ends.
As you might imagine, this presents a bit of a Catch-22.
On the one hand, you must file a lien to preserve your right to lien. On the other hand, filing a lien may complicate the payment problems for the prime or upper tier sub (and thus your payment problem), and may cause animosity when negotiations are otherwise calm.
Unfortunately, there is no easy fix for this complication. Each situation should be examined individually, and sometimes, a simple joint check agreement may be the solution. It’s just important to remember that good faith negotiations and waiting for payment under a contractual obligation to do so will not likely extend the lien period, and too much talk could result in the loss of lien rights.
Here are some great resources and articles on Pay When Paid provisions:
- Fourth Circuit Concludes Pay When Paid Clause is Unambiguous and Enforceable
- Pay When Paid or Pay If Paid Provisions
