• Ambiguous Pay-When-Paid Provision Unenforceable
  • May 30, 2003
  • Law Firm: Holland & Knight LLP - Tampa Office
  • Florida's Fifth District Court of Appeal held that a pay-when-paid provision of a construction contract was ambiguous and unenforceable. The clause in question provided: "payments will be made for the value of the work installed each week within 7 business days after receipt of payment by the owner." GEL Recycling, Inc. v. Atlantic Environmental, Inc., 2002 WL 1585579 (Fla. 5th DCA, July 19, 2002).

    The appellate court found the above sentence could be interpreted as either setting a condition precedent to payment of the subcontractor or as merely fixing a reasonable time for payment to the subcontractor. The appellate court construed the ambiguity against the contractor and held that, as written, the language of the pay-when-paid provision was insufficient to shift the risk of owner non-payment from the contractor to the subcontractor.

    Although the GEL Recycling decision is still subject to revision or withdrawal, if it stands as written, then it will further confirm the trend of Florida's state courts to strictly construe the language of pay-when-paid provisions in subcontractors' favor. In order for a contractor to maximize its probability of prevailing on a pay-when-paid defense to a subcontractor's claim, the pay-when-paid provision must be explicit, clear and not subject to interpretation as merely fixing a reasonable time for payment of the subcontractor.

    In other words, the pay-when-paid provision must clearly state that the subcontractor will be entitled to receive payment from the contractor only if the contractor receives payment from the owner. To further reduce the possibility of an adverse court ruling, it is advisable to place a statement in the contract establishing the contractor's and the subcontractor's agreement that the pay-when-paid provision establishes a condition precedent to payment of the subcontractor by the contractor and is not intended to be a reasonable-time-for-payment provision. Conditional payment provisions that effectively transfer the risk of nonpayment are referred to as pay-if-paid clauses in many jurisdictions.