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Are pay-when-paid clauses enforceable?

On Behalf of | Jul 16, 2020 | Business Law, Construction Law |

There are a lot of critical details when it comes to coordinating a construction project. The bigger the project, the more contractors you will count on to help you get the job done.

Since construction projects are expensive, you can have many people counting on you as they complete their work and supply the project with what you need. At the same time, you rely on the company that hired you to pay for the job as you and your workers complete it.

In some cases, your construction company may utilize a pay-when-paid clause, to postpone your obligation to pay employees until you receive payment. Here’s what you should know about when these clauses may not be enforceable.

If vs. when

There is an essential distinction between a pay-if-paid and a pay-when-paid clause. While subcontractors tend to read both of them in the same light, there is a significant difference.

A pay-if-paid contract can suggest that there is a time when a contractor will not need to pay the subcontractor, such as if they are not paid. Pay-when-paid clauses reassure workers that they will get paid.

Prompt payment, please

Minnesota statute requires prompt payment for contractors. While there is some room for pay-when-paid clauses in Minnesota, a pay-if-paid may not be enforceable.

Keep in mind, when you are creating a contract for your contractors, state statutes can supersede a clause that would help you avoid prompt payment of your contractors, even if you have not yet been paid.

If your contract is not enforceable, it could create an expensive situation. It is important to talk to a knowledgeable attorney when you are drafting contracts for your subcontractors.