How General Contractors Can Limit Their Liability
By Corey B. Stern
In a recent case, an Illinois Court has confirmed the ability of the General Contractor to limit its liability to pay the subcontractor/material-man, based solely upon whether the General Contractor gets payment from the Owner. Specifically, the court dealt with whether the parties’ subcontract required the General Contractor to pay the Subcontractor for the work performed.
In a typical contract, there are two type of payment provisions: “pay-when-paid” and “pay-if-paid.” The General Contractor could limit its responsibility to pay the Subcontractor by providing a certain contract provision called a “pay-if-paid” clause. In a pay-if-paid clause, a certain event is necessary before the General Contractor is required to pay the subcontractor. A pay-when-paid clause only addresses the amount and timing of the payments. For example, that the funds will be paid within a certain number of days after completion of the project.
A pay-if-paid clause addresses the ultimate liability of payment. In that regard, a certain action must occur first before payment must be made. For example: i) payment by the Owner to the General Contractor; ii) the completion of the work; iii) the architect issuing or approving of a certificate of payment; and/or iv) the architect’s or any other third party’s approval of the work. Any one or all of these actions could be required, before payment is required to be made by the general contractor to the subcontractor. There are no magic words that should be used. However, the use of the word “if” may help in the understanding of the payment terms.
A “pay-if-paid” clause provides notice to the subcontractor that the owner is solely responsible for payment for the construction work performed or materials provided.
As a practical matter, every General Contractor should have a “pay-if-paid” clause in its contract with the Subcontractor. Even if the General Contractor is signing the Subcontractor’s proposal, an addendum or separate page could be executed by the parties providing for this clause. In most construction contracts the General Contractor will be using the Owner’s money to pay its Subcontractors, so this payment term should be disclosed. There is no reason for the General Contractor to assume additional liability on a construction project which is already very fluid and riddled with unforeseen circumstances. Finally, by executing a “pay-if-paid” clause, in the event that a General Contractor needs to enforce its mechanic lien or contract rights against the Owner, the General Contractor can do so without also having to defend against the Subcontractor’s contract claim against the General Contractor.
For further information on drafting and enforcing home building contracts, drafting a “pay-if-paid” clause and prosecuting or defending any construction litigation issue, contact Corey B. Stern from Chitkowski Law Offices at 630-824-4809 or firstname.lastname@example.org.