Contracts and Claims
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Who Bears the Risk of Owner Non-Payment? Pay when Paid vs. Pay if Paid.

Philip W. Goodin & Joshua C. Dickinson

In every construction contract, the general contractor and its subcontractors must allocate the risk that the owner of the project either cannot, or will not, pay for work performed. The allocation of the risk can have a significant impact on the profitability of the project for all parties, and can lead to protracted litigation.

The simplest, yet least common payment structure is a "pay when done" clause. Under such a subcontract, the general contractor agrees to pay the subcontractor upon completion of the work regardless of whether the owner pays the general contractor for the work performed. This payment structure provides the least protection for the general contractor and is most advantageous to the subcontractors.

If the general contractor is not willing to take on all the risk of non-payment by the owner, it has two payment structures at its disposal: "pay when paid" or "pay if paid." A "pay when paid" clause is generally regarded as merely setting forth the timing for payment, not a condition precedent for payment. As such, if the owner fails to pay the general contractor, the general will still have an obligation to pay its subcontractors.

Finally, a "pay if paid" provision provides that the general contractor is only obligated to pay the subcontractor if it is paid by the owner. If the owner never pays the general, then the general is not required to pay the subcontractors. This type of clause affords the greatest protection to the general contractor.

Payment clauses are frequently litigated. Case law interpreting the various incarnations of these clauses varies from state to state, but Courts will generally presume that the general's obligation to the subcontractor are not contingent upon payment from the owner. For instance, in Missouri, if the clause is "clear and unambiguous, it will be interpreted as setting a condition precedent to the general contractor's obligation to pay," but if held to be ambiguous, the clause will be read to set forth a reasonable time for payment. Meco Systems, Inc. v. Dancing Bear Entertainment, Inc., 42 S.W.2d 794 (Mo. Ct. App. 2001). In Meco, the court held that a "pay when paid" clause was "ambiguous" where the otherwise clear language of the "pay when paid" clause was inconsistent with clauses in the main contract. The particular inconsistent provisions of the main contract in that case required that the general contractor pay for all work due under the contract before final payment. Id. at 807 n.7.

Subcontractors can always also argue that the Owner's nonpayment resulted from unrelated breaches of the general's contract with the owner. The general rule in Missouri is that "where a defendant prevents the performance of a condition of a contract, the condition is excused." Sassenrath v. Sassenrath, 657 S.W. 2d 671, 674 (Mo. Ct. App. 1983); AEE-EMF v. Passmore, 906 S.W.2d 714 (Mo. Ct. App. 1995). If the Owner has refused to pay the general contractor because of the general contractor's own breaches, the general contractor has, in essence, prevented the occurrence of the condition precedent and cannot assert the Owner's nonpayment as a defense.

A similar case in Illinois held that a general contractor could not assert a "pay when paid" clause when the general contractor was responsible for the Owner's nonpayment, reasoning that "the performance of a condition precedent is excused if the party for whose benefit the condition is created prevents the condition from occurring." Preload v. Marino Constr., 1991 WL 202651 (N.D. Ill. 1991). There does not appear to be any reason why Missouri courts would not follow this precedent.

Payment provisions are important in construction contracts. Both the contractor and subcontractor should give careful consideration as to the allocation of the risk of owner non-payment, and their bid prices should reflect who takes on that risk.


Philip W. Goodin & Joshua C. Dickinson practice with the Construction Litigation Team at Spencer Fane Britt & Browne LLP, a law firm with offices in Kansas City, Overland Park, St. Louis, and Omaha. They can be reached at (816) 474-8100 or (913) 345-8100.

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