One very simplified example would be a general contractor (GC) who waits for payment from a homeowner on work that the GC is providing. “When” the homeowner pays the GC, the GC can then pay any subcontractors (the subcontractor may often be a small business owner). The “pay-when-paid’ is reference to the timing of payments.
What happens in the situation – the homeowner never pays the GC? Is the GC liable to pay the subcontractor? “If” the homeowner pays the GC, then the GC will pay the subcontractor.
Some courts, in the past, have set forth that there exists ‘freedom of commerce’ between commercial parties. In other words, the GC and the subcontractor are ‘free’ to either enter the contract or not. The subcontractor does not have to enter into any agreement with the GC if the subcontractor believes that he will not be paid.
The subcontractor does not wish to assume the RISK of not getting paid after they have performed services.
If a small business owner ‘needs’ the work, then they are more likely to take on the risk in the hope of being paid. The decision is theirs; however, the small business owner is best advised to educate themselves about the situations when they are taking on the risk and include provisions for payment within a set schedule. The subcontractor should be fully aware of how they are assuming a ‘payment risk’ in the event that the GC is not paid.
In addition, simply put, as a small business owner, be aware of what risk you are taking on as a ‘subcontractor’ of services. Also, you would need to know what agreements have been signed between any ‘GC’ and the homeowner (or other parties), since often those agreements have ‘flow down’ provisions…meaning that if there was a waiver signed between the GC and homeowner, that waiver can be incorporated by reference to the subcontractor agreement.
Subcontractors should remember that such waivers can be stated in the owner’s contract with the general contractor, and then be incorporated by reference into the subcontract through any “flow down” provision.
Note: The above only touches upon the topic. It is beyond the scope of this article to identify all individual circumstances. Suffice it to say that contract law is not simple…and construction contracts can be complicated.
Also, keep in mind that often different states have different laws governing construction contracts.
Much is determined by the legal ‘language’ of the written contract. And remember - “Oral agreements aren’t worth the paper they’re not written on.”
Bottom Line: When in doubt, ask qualified legal advice before signing a contract. Know the risks you are assuming.
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