Subcontract payment clauses that pass the risk of owner nonpayment through to the sub have long been controversial. The subcontractor contracts with the prime contractor, not the project owner. The subcontractor has far less ability than the prime to determine the creditworthiness of the owner. But, if the owner doesn’t pay the prime and a pay-if-paid clause is enforced, the sub has no contractual entitlement to payment. The sub is then deprived of any mechanic’s lien or payment bond rights.
A Texas court recently enforced a pay-if-paid clause against a subcontractor. The court said it was reluctant to do so, but the clause was so strongly and clearly drafted it had no choice. The clause said owner payment to the prime was a condition precedent to subcontractor entitlement. The sub expressly assumed the risk of owner nonpayment and agreed it had priced its bid accordingly. When the owner failed to pay, the subcontractor was out of luck.
Other cases this week address the interpretation of a specification and the scope of the AIA reciprocal waiver of claims for insured losses. A contractor’s interpretation of a concrete repair specification was unreasonable because it focused on a couple of phrases while ignoring the totality of the specification. And, the reciprocal waiver applied to insurance the owner voluntarily purchased long after final acceptance of the work.
