Tag Archives: “pay-if-paid”

Show Me the Money: When Payment is Due on Massachusetts Public Construction Projects

By on April 5, 2017

Traditionally, general contractors on Massachusetts state-level public construction projects employed one of two types of risk allocation provisions in payment clauses in their subcontracts with subcontractors:  a “pay-if-paid” or a “paid-when-paid” clause.  This changed, however, due to a 2004 Massachusetts court decision that largely did away with condition precedent payment clauses commonly referred to as “pay-if-paid” clauses.  While the differences between the two clauses may not jump off the page, the use of one rather than the other had a significant impact on a subcontractor’s right to collect payment from the general contractor.

“Pay-if-paid” clauses create a condition precedent to payment.  That is, a subcontractor has no right to be paid for completed work until or unless the general contractor received payment from the owner.  “Pay-when-paid” clauses create no such condition precedent to subcontractor payment.  Rather, a “pay-when-paid” clause is a timing provision; that is, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within a ‘reasonable time’ the subcontractor retains the right to collect payment from the general contractor for its work.  Ambiguous contract language often complicated the subtle, yet substantial, difference between the two types of clauses, leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with the distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  In,  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004), the court reasoned, that absent express contract language, if “payment to the subcontractor is to be directly contingent upon the receipt by the general contractor of payment from the owner,” then the default interpretation of subcontract payment provisions, “should be viewed ‘only as postponing payment by the general contractor for a reasonable time after requisition … so as to afford the general contractor an opportunity to obtain funds from the owner.’”  This decision virtually eliminated “pay-if-paid” in favor of “paid-when-paid” clauses on Massachusetts state-level construction projects.         

While the holding in Framingham is generally good news for payment-seeking subcontractors, the issue remains, however, as to what a “reasonable time,” is to afford general contractors before general contractors must make payment to subcontractors should the owner not pay.  In Framingham, the court determined that where the payment issues originated in December 1998 and continued through March 1999, that by the end of April 1999, “the general contractor had exceeded any reasonable period of time,” and thus the subcontractor’s claim for payment for completed work could not be defeated even though the owner had yet to pay the general contractor for the subcontractor’s work.

There has been no subsequent case in Massachusetts that further defines the “reasonable time” standard to determine when general contractors must pay subcontractors when the general contractor objects to making payment as a result of a “pay-when-paid” clause.  Thus, subcontractors should be keenly aware of any developments in the law regarding what constitutes “reasonable time” for payment in connection with these provisions.  If you have questions regarding payment issues on state-level public construction projects you should contact a Massachusetts construction lawyer.   

Show Me the Money: Getting Paid on Private Massachusetts Construction Projects

By on March 15, 2017

As a general rule, parties to private contracts are afforded wide latitude to dictate and negotiate the terms as they see fit. While this notion of “freedom of contract” is an entrenched tradition within American law it is not without its limitations.  The Prompt Pay Act, enacted in 2010, is one such limitation that every Massachusetts sub-contractor and contractor should have an acute awareness of.

In effect the Prompt Pay Act requires that standard state provisions be incorporated into otherwise private construction contracts with an original valuation of over three million dollars. The Prompt Pay Act specifically affects the interpretation of payment clauses in such contracts.

As a reminder, “pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects.  Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.”

Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. On federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context.

The Prompt Pay Act directs that, on private construction projects valued at over three million dollars, payment clauses be interpreted as “pay-when-paid,” thus effectively eliminating “pay-if-paid” in most instances. Specifically, and with very narrow exception, “[a] provision in a contract for construction which makes payment to a person performing the construction conditioned upon receipt of payment from a third person that is not a party to the contract shall be void and unenforceable.” MGL c. 149 sec. 29E (e).

This statutory language is a clear attempt, in the name of the broad public interest, to provide protections to subcontractors by endeavoring to ensure swift payment for work provided in order to keep construction projects moving and companies afloat by regulating cash flow.

Smith Ironworks, Inc. v. Torrey Co., Inc., Not Reported in N.E.3d (2014), is the only Massachusetts case to discuss the Prompt Pay Act at any length. Even so, it is an arbitration decision as discussed in Smith, and not the Court itself, that provides the limited interpretation of the Act. In Smith, the subcontractor applied for payment from the contractor for work provided on a private project. Disputes as to the actual amount owed existed, however, rather than actively reject the request for payment, the contractor did not respond at all. Pursuant to the terms of the Prompt Pay Act the request for payment was deemed approved after the statutorily prescribed time passed without formal rejection. The parties submitted to voluntary arbitration and an arbitrator found that the contractor was liable to the subcontractor for the amounts submitted, plus interest, as the contractor failed to properly respond to the request for payment as prescribed by the Prompt Pay Act. The contractor was deemed liable even though it had not been paid in full by the owner.

To reiterate, while Smith details an outcome favorable to a subcontractor by application of the Prompt Pay Act, that outcome is not of true precedential value. Questions remain as to the effectiveness of the Prompt Pay Act. Specifically, questions regarding the true parameters and enforceability of payment timelines and the exact remedy for non-compliance. Thus, subcontractors should keep an eye towards the development of the law in this area and strive to understand how the Prompt Pay Act may apply to various projects. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.

Show Me the Money: Getting Paid on Federal Public Construction Projects

By on July 18, 2016

It is imperative that subcontractors and material suppliers seeking payment for completed work on federal-level public construction projects be aware of the paradigm of laws and policies that exist governing such matters. To start, The Miller Act, codified as 40 U.S.C. §§ 3131-3134, exists to provide subcontractors on federal-level public construction projects a means by which to secure their right to payment in an analogous manner to how M.G.L. c. 149, § 29 operates to provide Massachusetts subcontractors and material suppliers on state-level public construction projects a means by which to secure the same. Specifically, the Miller Act requires general contractors on federal projects to provide performance bonds and payment bonds to the awarding authority where the prime contract exceeds $100,000. (for a comprehensive overview of subcontractor Miller Act rights see, “Federal Subcontractors – Understanding the Basics of Your Rights Under the Miller Act.”). 

While the legal framework behind federal-level public construction projects and state-level public construction projects often operate in tandem it is imperative to note that Federal law and Massachusetts law treat the enforceability of “pay-if-paid” and “pay-when-paid” subcontract clauses somewhat differently. This distinction is one that subcontractors need be wary of when entering into public construction contracts.

“Pay-if-paid” clauses create a condition precedent to subcontractor payment. That is, a subcontractor has no right to payment for completed work until the general contractor has received payment from the owner. “Pay-when-paid” clauses create no such condition precedent to subcontractor payment. Rather, the general contractor has a ‘reasonable time’ to obtain payment from the project owner, but in the event the owner does not pay the general contractor within the ‘reasonable time’ the subcontractor still has the right to seek payment from the general contractor. Ambiguous contract language often complicates the subtle, yet substantial, differences between the two types of clauses leading to high stakes contract interpretation disputes.

In 2004, Massachusetts did away with the fraught distinction between “pay-if-paid” and “pay-when-paid” clauses on state-level public construction projects. See, Framingham Heavy Equip. Co., Inc. v. John T. Callahan & Sons, Inc., 807 N.E.2d 851, 855 (Mass. App. 2004). Thus with regard to Massachusetts state-level public construction projects “pay-if-paid” causes have been effectively eliminated in favor of “paid-when-paid” clauses.” 

Federal-level public construction projects, on the other hand, have not completely eliminated the distinction between “pay-if-paid” and “pay-when-paid” contract clauses. Thus, on federal-level public construction projects “pay-if-paid” language included in a subcontract could complicate subcontractor recovery in relation to the principal contractor. The limited amount of Federal case law on the issue, however, leads to the inference that Federal Courts disfavor allowing “pay-if-paid” clauses to operate in the federal-level public construction context, particularly on Miller Act projects.

According to Federal Courts in both the First and Ninth Circuits, “the Miller Act is ‘highly remedial in nature,’ and should be construed and applied liberally to ‘effectuate the Congressional intent to protect those whose labor and materials go into public projects.’” United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., 783 F. Supp. 2d 294, 296 (D.R.I. 2011) quoting, United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199, 1209 (9th Cir. 2002). Furthermore, according to the reasoning of the Ninth Circuit, because the Miller Act itself conditions payment, not on whether prime contractor is paid, but rather, whether the subcontractor has performed AND whether the statutory amount of time to bring a Miller Act claim has passed, it then follows that the terms of the Miller Act trump subcontract “pay-if-paid” language absent a “clear and explicit” waiver on the part of the subcontractor. Of particular note, the Ninth Circuit, specifically states, and the District Court of Rhode Island, located in the First Circuit, specifically quotes, the following language; “A subcontractor that has performed as agreed need not await the Government’s payment of the contractor before initiating an action under the Miller Act against the contractor or the surety.” United States ex rel Walton Tech., Inc. v. Weststar Eng’g, Inc., (9th Cir. 2002); United States ex rel. J.H. Lynch & Sons v. Travellers Cas. & Surety Co. of Am., (D.R.I. 2011).

The law is far from settled regarding the enforceability and distinction between “pay-if-paid” and “pay-when-paid” subcontract clauses on federal-level public construction projects. While there is some guidance on this issue in the context of the Miller Act, the distinction between the two clauses may still prove thorny for subcontractors seeking to enforce their right to payment.  Thus, subcontractors should keep an eye towards the development of the law in this area as it is likely that more distinct legal trends will begin to emerge. If you have any questions about payment issues on public construction projects you should contact a Massachusetts construction lawyer.

Five for Fighting:  Subcontract Provisions Every Subcontractor Must Know to Get Paid

By on September 2, 2015

While there are any number of subcontract provisions that subcontractors must be aware of in order to negotiate subcontracts favorably, the following five provisions are critical to insuring that your business gets paid for the work it performs.

Lien Provisions

Did you know that it’s perfectly legal to relinquish your statutory right to a mechanic’s lien in New Hampshire?  If you did, give yourself a small pat on the back.  All too often, however, subcontractors – especially those new to working in New Hampshire – fail to appreciate that they can waive their right to assert or maintain a mechanic’s lien through their subcontract.  Worse still, it is often the case that subcontractors learn this valuable piece of information at the very worst time:  when they need to secure a mechanic’s lien for delinquent payment on a project.

In order to avoid this painful result, have your subcontracts reviewed carefully in-house or by your attorney, with a specific focus on any provision or language that relates to waiving or relinquishing the right to assert, maintain or perfect a lien or an attachment against the owner or its property.  If you see it, don’t accept it.  The mechanic’s lien is a very useful tool to make sure you get paid in New Hampshire, and you shouldn’t give it away before you start your project.   

Retainage Provisions 

Most every project contains a retainage provision, so how different could they be?  If you treat retainage provisions interchangeably, you may go a long time before you get paid that all important final five to fifteen percent of your contract balance.

Retainage provisions are like Skittles:  many flavors and some are better than others.  For example, if you’re a subcontractor that performs work early on in a project, it will be beneficial to negotiate retainage reductions based on acceptance of your scope of work by the project owner.  If you accept a common retainage provision that simply calls for the owner to withhold ten percent until the completion of the project, and you’re responsible for clearing the site and preparing for building or paving, it may be years before your final retainage payment becomes due, let alone gets paid.  Surely, that final ten percent looks better in your pocket than the owner’s.  As a result, it’s imperative that you closely monitor the retainage provision in each subcontract you execute.

Retainage isn’t intended to be an annuity that you receive years after you perform your work, but instead should provide the owner some security that you’ll finish your scope of work after you’ve been paid the majority of your contract balance.  If you focus on negotiating a retainage provision that fairly accounts for your scope of work and its timing in connection with the overall project, you shouldn’t need to wait extended periods of time to receive the final payment you’re owed. 

Change Order Provisions

There are virtually as many change order provisions as there are subcontracts.  It seems that every general contractor or construction manager that doesn’t utilize an AIA subcontract document creates its own change order provision.  With so many iterations of a provision meant to capture the same thing, more or less, what should your company be looking for? 

In short, to maximize your chances of getting paid for extra or change work, subcontractors should strive to negotiate change order provisions that come as close as possible to mirroring the reality of performing work on a project.  More often than not, that reality is a fast-paced project with a limited schedule where changed or extra work cannot wait weeks for signed change orders from executive level corporate representatives.  As a result, subcontractors are best served by negotiating change order provisions whose terms are not unduly burdensome, restrictive or otherwise difficult to satisfy. 

For instance, the author recently reviewed several subcontracts which directed that only the company president or another board level executive were authorized to approve a change in scope.  This is hardly practical for a subcontractor.  Ordinarily, a general contractor’s executives are not in the field regularly, and do not have the kind of “hands on” knowledge of a project that a project manager or superintendent possesses.  Worse still, executives are not readily available to subcontractors, as a general matter.  As a result, it’s not difficult to anticipate the difficulties that a subcontractor is likely to face when trying to balance the need to perform change order work, to maintain the project schedule and to secure the appropriate written authorization to perform the work.  These competing interests often lead to subcontractors performing work before they are authorized to do so according to the terms of their subcontracts, based on spoken assurances from onsite representatives of the general contractor.  This, in turn, exposes the subcontractor to the risk that the general contractor or the owner will reject the change order and that a fight will be necessary to get paid.

Because the competing interests in performing the work, meeting the schedule and securing appropriate authorization for changes in scope exist on so many projects, subcontractors are best served by negotiating change order provisions that mirror, as closely as possible, the anticipated conditions in field.  Doing so will go a long way toward insuring that you’ll be paid for your extras.  To the extent that you have any doubt regarding what steps are necessary to make sure you’re complying with the change order provision in your subcontract, you’re well advised to speak with your construction attorney.

Pay if Paid Provisions

Construction lawyers frequently discuss the concept of “risk allocation” with their clients.  So what is risk allocation?  At is core, risk allocation is concept used to describe how the parties to a contract divide or allot the various risks attendant to a particular contract. 

 A “pay if paid” provision is a tool used by general contractors and constructions managers to reallocate the risk of nonpayment, that for many years, was borne by the general contractor or construction manager.  A “pay if paid” provision operates exactly as it sounds.  That is, it’s a provision that conditions payment to a subcontractor for work it performs on the upstream contractor first receiving payment from the owner, or from the party upstream from it.  In other words, if the general contractor doesn’t get paid from the owner, the general contractor has no obligation to make payment to its subcontractor, regardless of whether the subcontractor fully and dutifully performed its work.

Does it make sense for a subcontractor to accept a “pay if paid” provision in its subcontract?  The answer is unequivocally no.  The vast majority of subcontractors have no ability to determine the financial solvency of the owner or the dependability of its construction financing.  Furthermore, a subcontractor has no direct contract with the owner, as the general contractor does, which thereby limits the subcontractor’s potential legal remedies if the owner elects not to pay for any number of reasons that have nothing to do with the subcontractor.  Because of these issues and others, subcontractors should be reticent to execute any contract that contains “pay if paid” language.  Because “pay if paid” language can be difficult to discern from other kinds of risk allocation devices, such as “pay when paid” and similar provisions, if you have any doubt about what your contract specifies seek the advice of your construction attorney.

Attorney’s Fees Provisions

Last, but certainly not least, subcontractors must understand what the attorney’s fees provisions mean in their subcontracts.  Like all of the foregoing types of provisions, there isn’t a one size fits all remedy.  What stands out about the importance of an attorney’s fee provision is that in some very important instances, the only way to enforce or determine your rights with respect to each of the kinds of provisions discussed above, is to employ the services of an attorney.  And that costs money.  So, if you don’t have an adequate provision of this kind, you’ll be forced to decide whether or not to pursue claims for payment (or other claims) based not upon whether you’re entitled to be paid, but rather by how much you’ll have to spend to get paid.

This isn’t lost on some less scrupulous general contractors.  In some instances, if a general contractor knows you’ll have to spend enough money to chase payments you’re owed that it becomes throwing good money after bad, they’ll simply pocket the money you should be paid and force you to bring suit against them.  This is no way to keep your projects profitable.

In order to make sure that you don’t fall victim to this scenario, insure that your contract has an attorney’s fees provision that calls for your fees to be paid in the event that you need the services of an attorney to enforce your rights under your subcontract.

So what do you do when the general contractor won’t agree to an attorney’s fee provision that runs in your favor?  In that instance, you negotiate what is known as a “prevailing party” provision.  A “prevailing party” provision calls for either party to a contract to receive their attorney’s fees and other costs from the other side in the event that a particular party prevails in an arbitration or lawsuit.  As is the case with each of the foregoing kinds of provisions, the devil is in the details of the provision.  Nevertheless, if you’re diligent about reviewing (or having someone else review) the language of any proposed attorney’s fee provision, you’ll be much less likely to learn that your subcontract only gives the general contractor the right to recover its attorney’s fees. 

If you master the foregoing five kinds of provisions, or engage your construction attorney to help you do so, you will negotiate better subcontracts before you get started and you’ll almost certainly forestall a variety of construction disputes before they have the opportunity to ripen.  Should you have questions regarding any of the information presented here, you’d be well advised to contact your New Hampshire or Massachusetts construction attorney.