The Subcontract Contingent Payment Clause: How Does It Affect The Construction Industry?

by JAMS
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Originally published in Florida Bar Journal on February 13, 2013.

A contingent payment clause in a subcontract is the clause that provides that the subcontractor assumes the risk of owner nonpayment. Such clauses are favored by contractors for the ostensible purpose of managing the risk of owner nonpayment. Subcontractors are often faced with accepting the risk of owner nonpayment in a contingent payment clause when they can least afford to accept that risk. One issue about which there is no disagreement is that nonpayment for construction work WILL create practical problems regardless of legal issues. As a practical matter due to lack of capitalization, a smaller subcontractor may not have a real choice about slowing down or stopping work in the face of nonpayment, whether or not there is a legal right to get paid.

Which Clause? -

Florida has held that the issue of whether subcontract language communicates assumption of the risk of owner nonpayment may be considered as an issue of law (contract interpretation). Any ambiguity in the payment language will preclude enforcement of the clause as creating a contingent payment obligation and leave it as a time of payment clause, which requires payment to the subcontractor within a “reasonable time” in order to allow the contractor some time to receive payment from the owner. Courts are not clear on any particular period being a reasonable time for payment. The “reasonable time” for postponing payment has been defined to be the time within which the general contractor is actively pursuing collection, and while there remains a reasonable likelihood that the general contractor will actually collect the payment due from the owner. Two Florida courts have been the most beneficent to the subcontractor with respect to when payment is due under a time of payment clause. Florida courts have said a) A reasonable time occurred as of the writing of the appellate opinion, but was still a fact issue, and b) 90 days from completion of the work was a reasonable time (however the reasonable time of 90 days was agreed between the parties in that case).

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