Lovein Ribman Texas Construction Law

Texas Construction Attorneys

What is a Contingent Payment Provision (Paid-If-Paid and Paid-When-Paid) and when is it enforceable?

Most well-drafted commercial subcontract agreements contain a contingent payment provision which allows the Payor to suspend paying the Subcontractor until it has received payment from the upstream party.  There are two primary types of contingent payment provisions: (1) the “Paid-When-Paid” provision, which relates to the timing of payment, making payment due to the Subcontractor when the Contractor has been paid by the Property Owner.  Ironically, under this type of provision, even if the Prime Contractor never receives payment from the Property Owner, it is still obligated to pay the Subcontractor within a reasonable time; and (2) the “Paid-if-Paid” provision, which is much harsher than the Paid-When-Paid provision in that it completely shifts the risk of payment by the Property Owner to the Subcontractor and releases the Prime Contractor from its payment obligation in the event the Property Owner fails to pay.  However, to be an enforceable Paid-if-Paid provision, the language of the provision must make clear that payment is “conditioned” upon the Property Owner paying.  Without question, contingent payment provisions can produce rather harsh results, i.e., substantially delayed payment or non-payment, even if the work was properly and timely performed.  As such, Texas has enacted statutory exceptions which prohibit a Payor from enforcing a contingent payment provision: (1) if the Property Owner’s failure to pay is unrelated to, or not a result of the Subcontractor’s performance; or (2) when the provision would be considered “unconscionable” if enforced.  Additionally, there is a process wherein the Payee can opt out of being subject to a contingent payment provision after it has executed the Subcontract by providing notice to the Prime Contractor after not receiving payment within 45 days.  Note, that a contingent payment provision does not toll, suspend or in anyway affect a Claimant’s lien filing deadlines.