Pay-if-paid clauses are conditional payment provisions regularly included in construction subcontracts. The intent of these clauses is to shift the risk of loss from a prime contractor to its subcontractors by making a project owner’s payment to the prime contractor a condition precedent to the prime contractor’s obligation to pay its subcontractors.[1] The enforceability of pay-if-paid clauses is a frequent topic of dispute, becoming more complicated when a prime contractor posts a payment bond protecting subcontractors and suppliers from non-payment on a public or private project. Some states have enacted laws making such provisions altogether unenforceable. Other states have enacted laws that make such provisions unenforceable in connection with mechanics’ lien and payment bond rights. Below is a summary of current laws with respect to the enforceability of such clauses in the Mid-Atlantic Region; specifically, Maryland, Virginia, the District of Columbia, and Delaware. Prime contractors and subcontractors should carefully review the language of conditional payment provisions in subcontracts and be aware of the laws that govern their enforceability.
Maryland
Pay-if-paid clauses are generally enforceable in Maryland, where express contract language clearly demonstrates the parties’ intent to shift the risk of nonpayment to lower-tier subcontractors by creating a condition precedent. However, such clauses are unenforceable and cannot abrogate a subcontractor’s rights under Maryland’s mechanic’s lien laws or its rights against payment bonds posted on a public or private project in Maryland.[2] Any contract provision seeking to nullify these protected rights are considered void as against public policy. Even where a contract is governed by the law of another state that otherwise permits the waiver of such rights, such a waiver remains unenforceable on a Maryland project. Given the foregoing, as long as a subcontractor preserves its lien and/or bond rights, such pay-if-paid clauses are effectively not an impediment to payment. Awareness of, as well as meeting the deadlines related to, lien and bond claims is paramount.
The District of Columbia
The District of Columbia mirrors Maryland law on this issue for the most part. While the District generally enforces pay-if-paid clauses, it too has adopted legislation making such provisions void with respect to a subcontractor’s lien and/or bond rights on private projects.[3] However, the District has not codified such a prohibition related to bonds posted on public projects.
With respect to bond claims, the District looks to Maryland law, as well as federal cases governing payment bonds on federal projects pursuant to the Miller Act.[4] In analyzing the District’s “Little Miller Act”— which substantially aligns with the Miller Act—the Federal Court in D.C. declined to enforce a subcontract term that delayed a subcontractor’s bond claim, finding it effectively to be an unenforceable waiver of the subcontractor’s payment bond rights under the Little Miller Act.[5] In so holding, the Court cited several cases finding pay-if-paid clauses to be unenforceable waivers of bond rights. As such, a pay-if-paid clause will not foreclose a subcontractor’s lien and/or bond rights on private projects or, arguably, on public projects in the District.
Virginia
In 2022, Virginia enacted Va. Code Ann. § 11-4.6(B)(2), which went into effect on January 1, 2023, thereby joining several other states in prohibiting the enforcement of pay-if-paid clauses and similar conditional payment provisions in private construction contracts. That said, Va. Code Ann. § 11-4.6(B)(2) includes a carve-out that makes such clauses enforceable when a contractor is insolvent or a debtor-in-bankruptcy, as well as against material suppliers with no on-site presence. This law also does not apply to public projects. Va. Code Ann. § 11-4.1:1 further makes any clause in a subcontract that diminishes or waives the subcontractor’s or material supplier’s payment bond claims null and void. It does not, however, specifically provide that pay-if-paid clauses diminish or waive a subcontractor’s bond rights, and there is no case decision holding that such clauses are unenforceable. Given the language of that statute, as well as federal cases finding such clauses to be void with respect to the Miller Act—which is similar in language and purpose to Virginia’s Little Miller Act[6]—an argument in that regard may prevail in a Little Miller Act action.
Delaware
In most circumstances, Delaware law renders pay-if-paid clauses—and similar provisions attempting to shift the risk of owner nonpayment to subcontractors in private construction contracts or subcontracts—void and unenforceable as against public policy.[7] This includes any provision that makes payment by an owner a condition precedent to a surety’s obligation to make payment to a subcontractor under any payment or performance bond. However, this general prohibition does not apply to public works contracts in Delaware. While there is otherwise no case decision holding that pay-if-paid clauses are unenforceable in a public construction contract, Delaware’s Little Miller Act prohibits any contractor or surety from relying on a limitation or restriction contained in a statutory bond as a defense to an action against said bond where such restriction contravenes the statute’s requirements and purposes.[8] As such, a pay-if-paid clause may not foreclose a subcontractor’s bond rights on public construction projects in Delaware.
Takeaways
Parties must pay careful attention to the express language of conditional payment provisions in their subcontracts. They must consider what state law precludes such provisions, as well as to what extent they impact a subcontractor’s bond and lien rights. If you are a prime contractor or subcontractor and have questions regarding the enforceability of a contingent payment clause or need assistance with a claim on a public or private construction project, please contact Jessica duHoffmann, Jonathan Neri, or another member of PilieroMazza’s Construction, Labor & Employment, or Government Contracts practice groups.
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[1] Alternatively, pay-when-paid clauses relate to the timing of the subcontractor’s payment, allowing a contractor to delay payment until receipt of owner payments, but not indefinitely.
[2] MD Code, Real Prop., § 9-113(b); MD Code, State Fin. and Proc. Art., § 17-108(d)(2).
[3] D.C. Code § 27A-104.
[4] 40 U.S.C. § 3131 et seq.
[5] D.C. for use & benefit of Strittmatter Metro, LLC v. Fid. & Deposit Co. of Maryland, 208 F. Supp. 3d 178, 185 (D.D.C. 2016).
[6] Va. Code Ann. § 2.2-4337.
[7] Del. Code Ann. tit. 6, § 3507(e).
[8] Del. Code Ann. tit. 29, § 6962(d)(9)(e).
