Pay-when-paid (or pay-if-paid) contractual provisions are common contractual provisions in subcontracts. These provisions shift the risk of an owner’s non-payment from a general contractor to the subcontractor. This means that the owner’s payment to the general contractor is a condition precedent to the general contractor’s payment to subcontractors.
However, if there is an unconditional payment bond, the pay-when-paid provision is NOT a defense to the subcontractor’s claim against the payment bond surety. What does this mean? This means that if an owner has not paid a general contractor, the general contractor’s payment bond surety is still on the hook for payment to subcontractors. While the pay-when-paid defense would be a defense available to the general contractor, it would NOT be applicable to a claim by an unpaid subcontractor against the general contractor’s payment bond.
If you are an unpaid subcontractor, it is important that you understand your payment bond rights and properly preserve those rights.
If you are a general contractor, it is important that you understand that the pay-when-paid defense would not be available as a defense against a payment bond so that you can best defend and/or resolve a subcontractor’s payment bond claim.
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