Baker Law Group LLC’s Post

Transcript

- Captions Auto-Generated - It is common in design and construction for one party to insert a clause in their contract which conditions their obligation to pay someone they hired, a downstream party on receiving payment from their client, the upstream party. This usually plays out when a contractor inserts a clause in the contract with their subcontractor that says until the owner pays me the GC, I'm not going to have to pay you the subcontractor. And these are generally known as, as pay when paid clauses or pay if paid clauses. And there is a difference. A pay when paid clause is typically something that is less frowned upon by the laws of most states, because it is not an absolute bar to the lower tier party getting paid. It's more about timing. Pay if paid clauses are a little more aggressive in so far as the general contractor in this scenario would be saying, I don't have to pay you if I don't get paid. And so the law of pay if paid and pay when paid clauses varies greatly from state to state. So you need to be careful about where, you know, you're assessing any particular contract clause, you know, and I'm not here today to opine on whether, you know these clauses are good or bad. You know, sometimes I use them in the contracts I negotiate and sometimes I strike them out of the contracts I negotiate. You know, this is a complicated subject. What I wanted to talk about today is, you know, whether or not those clauses tend to be enforced under Illinois law to bar claims for payment. And what the nuance is in the state. You know the punchline is, is that these clauses can hamper claims for payment, you know, and, and they are not entirely brushed aside. But there are some alternative means of seeking payment in the event that you do run into the bar of an enforceable pay when paid or pay if paid clause. So, you know, just at a high level, these clauses are generally disfavored by the laws of most states, but they're often enforceable and again, pay when paid is less odious. Pay if paid is generally enforced only if you get the contract just right, because it's a little bit more punitive. It's, it's a little bit more, the lower tier party might not wind up getting paid at all. It's not a question of timing. In the law in most states, and I think it's true in Illinois is those kind of clauses are going to be enforceable or not based upon the quality of the contract. You know, does the contract have, you know certain, you know, magic language to use, you know air quotes. Under Illinois law these clauses tend to have a greater impact on claims for breach of contract when one party is alleging their contract is breached for lack of payment than in other types of claims like mechanics lien claims. You know, in Illinois, if you have a contract that makes, you know, an unambiguous condition precedent, you know, that, you know, you will not be paid unless I get paid, or you will not be paid until I get paid. If it's unambiguous and there's lots of room to fight about what that is. There's a chance that these clauses could be enforced which would hurt the downstream party's chance of bringing a breach of contract claim from not paying. You know, the leading case in this area in Illinois is a few decades old, and there's a lot of nuance about what makes that sort of language unambiguous or not. But, you know part of the analysis that courts go into is whether or not the subcontractor, you know, knowingly assumed the risk of nonpayment, or is this just really fine print that was a kind of snuck in the back of some terms and conditions. Now, you know, the good news in Illinois anyway for unpaid parties is that under the Illinois Mechanics Lien Act, pay if paid clauses and pay when paid clauses are generally not defenses to mechanics lien claims. And while I'm not here to talk about bond claims, sometimes you know a bond can be a meaningful way. A payment bond can be a meaningful way of getting around these clauses as well. And now mechanics liens in Illinois are hugely complex. There's a few different kinds, you know, for public projects and private projects. And so, you know you should not take what I'm saying here to the bank without, you know, discussing it with your lawyer. But the Illinois Mechanics Lien Act has a section which reads that, and I'm paraphrasing here, that any provision in a contract when payment from a contractor to a subcontractor or supplier is conditioned upon receipt of payment from another party. Obviously we're talking about from the owner to the general contractor, that a provision is not going to be a defense by the party responsible for payment to a claim that's brought under and the lien act lists various sections of the lien act which provide a variety of different claims. And so I think the takeaway is that in Illinois, you know, are court's going to just disregard a pay if paid or pay when paid clause? No, they're not. Are they always going to be enforceable? Not necessarily. You know, it depends upon the circumstances. It depends upon the contract, it depends upon the project. It depends upon the parties. But in the event that you do run into the bar of a pay if paid or pay when paid clause, when you're serving a breach of contract claim for non-payments at least an Illinois law, if you get everything else right, and you're able to perfect your mechanics lien claim, you usually are able to make a claim for payment against various responsible parties. You know, this can in some circumstances include not just the general contractor or the prime design professional that's above you, but also a lower tier party can actually hit the owner with a direct claim under the Illinois Mechanics Lien Act. Not just one that attaches to the property, but in some circumstances also a claim for a money judgment against the owner. (gentle music)