A Catch-22: Pay When Paid Clauses Do Not Extend the Lien Period

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.

We 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

- Is Your Pay When Paid Clause Worthless?

- Contingent Payment Clauses, Use With Caution

This article was originally posted on Express Lien’s topic-specific Construction Lien Blog.

Problems Can Arise When Using One Contract in Multiple States

Bowie & Jenson’s Construction Law Forum blog just posted about a case out of the U.S. Fourth Circuit that demonstrates problems that may arise when a contractor uses one form contract in two different states.  In the 4th Circuit case discussed, Universal Concrete Products v Turner Construction Company, Maryland and Virginia were the bordering states involved, and the legal issue related to a “pay when paid” provision.

In Virginia, “pay when paid” provisions conditions any payment to a subcontractor on the general contractor receiving payment from the owner.   If the general contractor never receives payment, the general contractor never needs to pay the subcontractor.

In Maryland, however, the “pay when paid” provision is not so strong.   Maryland distinguishes “pay when paid” clauses from “pay if paid” clauses, considering the first type of provision one requiring payment to the subcontractor within a “reasonable time” after work is concluded, and the second type of provision requiring payment only if and after payment is received from the owner.

The subtle difference in the law was a big difference to the general contractor, who was likely using the same contract in both Maryland and Virginia.

While we don’t practice in Maryland and Virginia, the problem here isn’t isolated to those two states.    This problem can arise between any two bordering states.

Our clients in Washington and Oregon frequently work in each other’s state.  Our clients in Louisiana frequently work in Mississippi or Texas.   While “business” between the two states may feel seamless to the business owners, the laws can be drastically different.

Great Resources for Mississippi Construction Law

This afternoon, I was reading a post on Bowie & Jenson’s Construction Law Forum blog about problems that may arise when using the same subcontract in more than one state. The case discussed in the blog post regarding the differences in interpretation of a pay when paid clause in Maryland and Virginia. While we don’t practice in either of those states, we very frequently encounter clients who are working across borders.

When it comes to Louisiana construction companies, they are frequently working in Mississippi.

Out of curiosity, I performed a little research on the treatment of pay when paid clauses in Mississippi to compare it with Louisiana’s treatment of the same. Immediately I went to my two favorite resources for Mississippi Construction Law, and figured our readers could benefit from these two resources and there’s no reason to keep them a secret. So here goes:

Robert Wise
While Robert doesn’t run a construction law blog, he has a bunch of great published articles available for download on his website. Take some of these as examples:

• Mississippi Construction Lien, Bond, Stop Notice, Open Account & Contractor Prompt Payment Claims (pdf)
• Mississippi Construction Bid Mistakes (pdf)
• Mississippi Construction Supplier’s Collection Law Tool Kit (pdf)

Construction Law Toolbox Blog
The Construction Law Toolbox blog is published by Mississippi law firm Robinson, Biggs, Ingram, Solop & Farris, PLLC. The blog provides consistent quality posts about construction law issues that affect those performing construction work in Mississippi. Here are some example posts:

• Do you have coverage under your commercial general liability policy for defective subcontractor construction? (link)
• He who hesitates is lost – Protecting Payment Rights in Mississippi (link)
• Can I Rely on my Subcontractor’s Certificate of Insurance? (link)

Oh, and the result of my pay when paid clause research, thanks to help from Mr. Wise is this:

In Louisiana, “pay when paid” requires payment within a reasonable time, regardless of whether payment was ever received from the property owner. “Pay if paid” clauses, on the other hand, makes payment from the owner an absolute condition precent to payment further down the contracting chain.

In Mississippi, it doesn’t seem to matter how it’s written: pay if paid, pay when paid, etc. The result is the same: payment is due within a reasonable time, regardless of whether payment was ever received from the property owner.

This article was originally posted on Wolfe Law Group’s topic-specific Louisiana Construction Law Blog.