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).1 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.2 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.3
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,4 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).5
A contingent payment clause6 in a subcontract clearly
communicates that the subcontractor assumes the risk of
owner nonpayment.7 Courts have generally held that where
there is a contract with an enforceable contingent payment
clause, the subcontractor may not avoid or get around
the contingency in the express subcontract by making an
equitable claim for unjust enrichment.8
WHAT IS THE EFFECT OF THE SUBCONTRACT CONTINGENT
PAYMENT OBLIGATION ON CONSTRUCTION INDUSTRY
PARTICIPANTS
Owners. In most cases the owner has a goal to obtain
the completed construction promptly so that the owner
can occupy, rent, use, live in, or sell the completed
construction. Generally the owner wants the job completed
as soon as possible or by a time certain. The owner also
is very interested in not paying more than a reasonable
amount for the improvements, and not paying twice for
the same work (for obvious reasons). The owner could be
faced with paying twice in the event of a) failure to comply
with statutory construction lien procedures, or b) having
overpaid a defaulting uncollectible contractor. Looking at
the owners’ interests: timely completion and payment one
time for work done, what is the impact of the contingent
payment clause in the subcontract?
Timely Completion. Timely completion of the work is a key
owner goal. However, when a subcontractor does not get
paid the funds it needs to pay for its labor and materials,
that subcontractor may do two things:
1) Search for creative reasons to stop performing or slow
down the performance (and cash outflow) of the work. If
the subcontractor searches for and finds a reason (other
than nonpayment, the real reason) to stop the work, the
result may be the subcontractor making a claim and/
or seeking a time extension. The administrative activity
addressing possible “creative” claims, along with the
slowing or stopping of the work itself, directly and
adversely impacts the owner’s interest in getting the job
timely completed.
1.800.352.JAMS | www.jamsadr.com
This article was originally published by the Florida Bar Journal
and is reprinted with their permission.
THE SUBCONTRACT CONTINGENT
PAYMENT CLAUSE: HOW DOES IT AFFECT
THE CONSTRUCTION INDUSTRY?
By Larry R. Leiby, Esq.
