Pay if Pay Contract Provisions in Texas. Are they Enforceable?
While doing a mini lien and bond presentation last week at NAWIC Fort Worth (a great group of ladies and a great organization) I was asked whether pay-if-pay provisions are illegal in Texas. The question sparked some lively conversation so, for those that may have that same question, here’s a bit of background and the answer: A pay-if-pay provision is a contract term whereby a party can shift the risk of owner (or upstream) non-payment to a downstream pay recipient. In other words, a GC can shift the risk of owner non-payment to the sub, thereby eliminating the GC’s obligation to pay the sub for the work the GC hires the sub to perform unless and until payment is obtained from the owner. This can, of course, also be applied by a sub to a sub-sub or other vendor. The ultimate goal with this provision is to eliminate the “middle man’s” obligations to pay for the work/materials it contracted to have performed/provided. Unlike other states, done correctly, pay-if-pay provisions are absolutely enforceable in Texas. Done incorrectly it becomes a pay-when-paid provision that requires payment within a reasonable period of time.
Pay When Paid – What is a Reasonable Period of Time?
What is a reasonable period of time? There’s no set time limit – it’s a question of fact to be decided in the event of litigation.
The bottom line is that you should read any contract you’re being asked to sign to identify the risks you’ll be agreeing to undertake. If you don’t want to get stuck depending on the owner (generally a stranger to you) for payment, request that the pay-if-pay provision be stricken. If you cannot get it stricken then consider personally reviewing the owner’s financials to ensure, as best you can, the owner’s ability to pay its bills as they become due. Also consider requesting the GC assign you the right to pursue payment directly from the owner in the event of non-payment. While not a guarantee of payment, both are powerful and under-utilized tools in the world of pay-if-pay.
By: Karen Ensley
Karen can be reached at karen@eblawtexas.com