Koch v. Construction Technology, Inc.
924 S.W.2d 68 | Tennessee Supreme Court | 1996
What This Case Means for Subcontractors
A painting subcontractor sued a general contractor over unpaid work on a Memphis housing project. The general contractor had a 'pay when paid' clause stating the subcontractor would only be paid when the general contractor received payment from the owner. The Tennessee Supreme Court ruled that 'pay when paid' clauses are timing provisions, not conditions that eliminate the general contractor's obligation to pay. The court found the clause did not shift the owner's credit risk to the subcontractor without very clear language stating that intent. This decision protects subcontractors from being left unpaid if the owner fails to pay the general contractor.
Key Takeaways
- •A 'pay when paid' clause delays payment timing but does not eliminate the general contractor's obligation to pay you—the general contractor still owes you even if the owner doesn't pay them
- •Courts disfavor conditions that shift financial risk to subcontractors; a 'pay when paid' clause must use extremely clear language to actually make your payment conditional on the owner paying the general contractor
- •Review your subcontract carefully—if it contains a 'pay when paid' clause, you likely still have a right to sue for payment even if the general contractor claims the owner hasn't paid them
Condition precedents are not favored in contract law, and will not be upheld unless there is clear language to support them.
Frequently Asked Question
If my subcontract says 'pay when paid,' can the general contractor refuse to pay me until the owner pays them?
No. A 'pay when paid' clause only delays when you get paid—it doesn't eliminate the general contractor's obligation to pay you. The general contractor cannot use the owner's non-payment as an excuse to avoid paying you unless the contract uses extremely clear language stating that your payment is conditional on the owner paying first. You can still sue for payment even if the owner hasn't paid the general contractor.
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