General contractors seeking to shift the risk of non-payment to subcontractors by making payment to subcontractors contingent on payment by the owner include “pay if paid” clauses in the subcontract; however, in Maryland, a subcontractor may not bear the entire risk if the clause does not contain specific language, as required by Maryland Courts.
Maryland Courts have recognized two distinct types of payment clauses: “pay if paid” and “pay when paid.” In Maryland, a “pay if paid” clause bars recovery by the subcontractor from the general contractor if the owner fails to remit payment. On the other hand, a “pay when paid” clause merely postpones the time for payment until payment by the owner OR for a reasonable period of time. Thus, “pay when paid” clauses simply require a reasonable time to pass before payment is due and owing to the subcontractor, regardless of payment by the owner.
The difference between whether a contract clause should be considered a “pay if paid” clause versus “pay when paid” clause centers on the use of specific language in the clause. In Maryland, a “pay if paid” clause must provide that payment by the owner to the general contractor is a “condition precedent” to payment to the subcontractor. Without the use of the words “condition precedent”, the clause could be interpreted as a “pay when paid” clause and would require the contractor to pay the subcontractor within a reasonable amount of time, even if the owner fails to make payment.
On a related note, Maryland allows a subcontractor to circumvent a “pay if paid” clause by bringing forth a mechanic’s lien against the owner or suing on a contractor’s bond. Codified in the Maryland Annotated Code, Real Property §9-113, a provision in an executory contract between a contractor and a subcontractor that conditions payment to the subcontractor on receipt by the contractor of payment from the owner or any other third party does not abrogate or waive the right of the subcontractor to bring a mechanic’s lien claim or sue on a contractor’s bond. Essentially, a subcontractor still has options to obtain a recovery even if a valid “pay if paid” clause exists.
For additional questions, please contact Michael W. Siri at email@example.com.