August 26, 2015 Articles

Sure I Can or Sure I Can't?

By Michael Jay Rune II and Dana Chaaban

Under the law of contract formation, most aspects of transactions, services and/or liabilities may be negotiated and contracted for based upon the parties' "freedom to contract." In the field of construction law, such "freedom to contract" includes a recent trend where general contractors have begun to negotiate a shift in the distribution of risk away from the general contractor and to the subcontractor with the inclusion of contractual clauses that make the general contractor's receipt of payment from the owner a condition precedent to the general contractor's ultimate payment to the subcontractors. Such a shift is important because ordinarily a general contractor bears the risk of an owner's potential insolvency, and these clauses—informally termed "pay-if-paid" clauses—may be enforceable even though a subcontractor has fully performed its obligations under the subcontract. Contracts with such provisions typically consist of some variation of the following contractual language:

Subcontractor agrees that Contractor shall be under no obligation to pay Subcontractor for any work performed or materials or equipment furnished for this Project unless and until Contractor has been paid therefore by Owner, and the making of any and all progress and final payments and the amount thereof are expressly subject to this condition precedent. Subcontractor states that it relies primarily on the credit and ability of Owner to pay and not upon Contractor's credit or ability, and further, expressly accepts the risk that it will not be paid for work performed by it in the event that Contractor, for whatever reason, is not paid by Owner for such work.

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