Glossary · Legal and regulation
Pay-when-paid clause
Also called Pay-if-paid clause, Conditional payment clause
A pay-when-paid clause makes a contractor’s payment to a subcontractor depend on the contractor first being paid by its own client.
Common in construction and subcontracting, these clauses push the risk of the end client’s non-payment down the chain. “Pay when paid” is usually read as a matter of timing; “pay if paid” as a condition, so that if the contractor is never paid, neither is the subcontractor.
Many jurisdictions restrict them. In the UK, the Housing Grants, Construction and Regeneration Act 1996 makes pay-when-paid clauses ineffective in construction contracts, except where the paying party upstream is insolvent. In the US, some states, including California and New York, refuse to enforce pay-if-paid clauses, while others enforce them if they are clearly written.
Outside construction, similar wording appears in agency and subcontracting agreements. Read for it before signing: it can turn your client’s client into your credit risk.
Example
A subcontractor finishes $25,000 of work under a pay-if-paid clause. The main contractor’s client never pays. In a state that enforces the clause, the subcontractor may receive nothing.