Pay-If-Paid or Pay-When-Paid Clause May Not Preclude Subcontractor Payment Bond Claim or Filing of Lien

Many subcontracts expressly condition payment to the subcontractor on receipt of payment from the owner by the prime contractor. Such a provision is typically labeled as a "pay-when-paid" clause. This clause postpones the time for payment to the subcontractor until payment is made 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. Whereas, a "pay-if-paid" clause is intended to shift the risk of non-payment of the owner to the subcontractor and makes payment by the owner an express and absolute condition precedent to the prime contractor’s payment to the subcontractor.

These clauses have been enforced by some courts where the language in the clause makes payment by the owner to the prime contractor an express condition precedent to payment of the subcontractor. Nonetheless, subcontractors may have the ability to recover payment from the prime contractor’s surety where a payment bond has been furnished. As explained by one federal court:

The Miller Act is ‘highly remedial in nature,’ and so ‘entitled to a liberal construction and application in order to properly effectuate the Congressional intent to protect those whose labor and materials go into public projects.’ ‘[C]ommon sense dictates that it would defeat the policy underlying the Miller Act to read a pay-when-paid clause as precluding a subcontractor from bringing suit until its contractor receives payment.’ To enforce a pay-when-paid clause in this context would delay many claims beyond the Act’s one-year statute of limitations, and would thus render the clause an implicit waiver of the subcontractor’s Miller Act rights.

(Citations omitted.) This same rationale could also be applied where there is a "pay-if-paid" clause in the subcontract and under Mississippi’s payment bond statute.

Even if a payment bond has not been furnished on a project, a subcontractor on a private project may be able to file a lien and action to enforce the lien to avoid non-payment by the owner to the prime contractor. See generally, Miss. Code Ann. §§ 85-7-401, et al.

Right to Recover Under Federal Miller Act Overrides State Law Barring Recovery

California’s Business and Professions Code bars a non-licensed contractor from an action to collect for unpaid services. However, the Ninth Circuit Court of Appeals recently held that this state law ban on such actions has no application if the services were provided to a federal project and suit is filed to collect under a Miller Act payment bond.

Plaintiff Technica, Inc. was a sub-subcontractor to Candelaria Corporation, a prime contractor on a federal fence replacement contract. Carolina Casualty Insurance Company issued the payment bond required by the Miller Act (40 USC § 3131 et seq.). Technica submitted invoices in excess of $800,000 to Otay Group, Inc. (a subcontractor) and Candelaria. After Candelaria terminated Otay and full payment had not been made to Technica, Technica sued Candelaria and Carolina Casualty in federal district court under the Miller Act.

The district court granted the prime contractor and surety’s motion for summary judgment on grounds that Technica did not hold a California contractor’s license. The Ninth Circuit reversed, following United States Supreme Court precedent and decisions by the Eight and Tenth Circuits. Distinguishing this case from others that dealt with the substantive law of contracts, the Ninth Circuit held that the California statutory limitation on the right to maintain an action "does not apply to an action under the Miller Act." The rationale was that "application of California’s licensing statute as a defense to a Miller Act claim would…condition the rights of a subcontractor on the procedural requirements of state law … and … result in the nullification of those rights entirely." The Ninth Circuit’s opinion is attached here for convenience.