Following the construction industry and related legal topics in the United States.


Wednesday, May 17, 2006

Enforceability of "Pay-When-Paid" Clauses

What are the status of "Pay-if" and "-when" clauses in North Carolina? Clearly the traditional "Pay-if-paid" clause, which attempts to shift the credit risk of the owner to subcontractors, is out. But what about the traditional "pay-when-paid" clause, which only provides for timing of payment (or cash flow terms)? Some commentators appear to speak of the "pay-when-paid" clause as if it were one in the same as the "pay-if-paid" clause.

Many, if not most, jurisdictions clearly make a distinction. A careful reading of Section 22C-2 of the North Carolina General Statutes would seem to limit it to the traditional "pay-if-paid" situation. It would seem that contractors should still be able to negotiate a reasonable term for the time for payment with its subcontractors, to the extent it has not yet received payment from the Owner. However, once payment is received by the contractor from the owner, Section 22C-3 requires prompt payment within 7 days of such receipt. Note should be made of these provisions inapplicability to certain residential projects. See N.C. Gen. Stat. Section 22C-6.

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