Right to Contract<\/u>:
Valid contractual provisions
"freely" negotiated between the Parties will not be interfered with (e.g. "the freedom to contract"). <\/td>
Uphold and enforce the PIPs; only, if explicit, clear, and unambiguous.
The Courts will (normally) actively attempt to find a "creative" way to not enforce PIPs, but will ONLY enforce, if "bulletproof".<\/td>
Views PIP and PWP as mutually inclusive and recognizes the resulting "merged" clause as only an implied guarantee of payment within a reasonable time after lower-tier subs' completion of the relevant work.<\/td>
Void as a matter of public policy, regardless of the language included in the clause; via legislative acts (prompt pay acts, mechanics lien, etc.); or prior judicial decisions.
Even with the pressure of these contingent pay agreements, Prime/GCs must seek payment from Owner reasonably; within its normal course of business; and in accordance with its historical billing and pay app submissions upstream. Good faith is/should always be maintained; in such a way the GC/Prime is acting on behalf of its downstream subs. (i.e. customary due diligence). Most times, GCs/Primes are seen as "the captain of the ship" and in charge of the crew/everyone onboard (i.e. the lower-tiered subs) which higher standards and responsibilities are inherently assigned by the Courts. As a result, Courts are normally unwilling to assign blame or responsibility to subs that maintained equitable clean hands during the events and/or circumstances which led to the relevant underlying condition causing nonpayment. While pure economics sometimes seem to control and direct the decisions of the Prime/GC; they (Prime/GC) must be acutely aware of maintaining good working relationships with their downstream partners. Any ambiguities in these clauses will be construed against the GC/Prime and, at a minimum, convert an intended, contingent payment provision (i.e. PIP) into a clause guaranteeing payment to a downstream sub, within a reasonable time after completion (i.e. PWP). For public policy purposes, most jurisdictions will invalidate PIP and PWP clauses, in so much, as they interfere, frustrate, and/or prohibit any lower-tiered subcontractors' exercise of their statutory mechanics' lien rights or violate other statutory directives (e.g. prompt-pay laws/acts). Courts actively try to "equal the playing field" somewhat by not enforcing PIP clauses on equitable grounds, in an attempt, to provide a shield to the "little guy" from the "big guy's" deep pockets and more competent and able legal team.
- Prompt Payment Laws/Acts (PPL): Outline requirements and timing of payments due; interest for late payments; and protections for "good faith" billing disputes.
- Does your jurisdiction have any PPL's? If so, what are their scope and specifics?
- Are the relevant PPLs applicable to Private and Public projects? Or just public?
- Presence of any Choice of Law provisions?
- "Prevention Doctrine": estoppel theory utilized to prevent the application and subsequent enforcement of the relevant condition payment clause(s) due to "questionable" behavior by an upstream contractor.
- Higher-tiered contractors must not frustrate or "hinder" fulfillment of a condition precedent and must act diligently; in good faith; and in accordance with industry standards in pursuing payment and working on behalf of their downstream subs.
- As Prime/GC's are in the premier position to work closely with the Owner during the duration of the Project to alleviate, remediate, and/or cure any deficiencies, issues, and/or concerns which might later lead to default and/or serious delays in payment.
Key Takeaway for the Neophyte-Construction Practitioners:
- PIP and PWP payment provisions are extremely jurisdiction sensitive. A new practitioner should be mindful to perform adequate research to achieve an understanding of the current jurisdictional treatment of these contractual clauses.
- PWPs are viewed by most Courts as timing tools and NOT as a risk transfer scheme and/or to bypass responsibility/obligation for payment downstream.
- PWP clauses will be void of any explicit language establishing the requirement of the upper-tiered contractor to be paid, if full, as a condition precedent before the obligation to pay the lowered-tiered subs.
- Make yourself familiar with your specific jurisdictional positions of both clauses and whether they are viewed as one-in-the-same (i.e. mutually inclusive) or separate, standalone (i.e. mutually exclusive) with varying obligations and duties of the upstream contractor (i.e. Prime/GC) downstream to the relevant downstream subs. While there are two distinct ends of the spectrum on these clauses, as reflected in the table above, jurisdictions vary widely and often depart from a pure-contracting theory analysis and push into the quasi-contractual equitable realm.
- These clauses are not impossible to get a firm grasp on; if you are willing to dig into the current case law and relevant statutory scheme(s).