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Maryland’s Highest Court Rules on Clauses in Construction Subcontracts: “Pay-When Paid” & “Paid-If-Paid”

The Court of Appeals of Maryland recently revisited the law concerning “pay-when-paid” and “pay-if-paid” clauses in construction subcontract agreements. In Young Electrical Contractors, Inc. v. Dustin Construction, Inc., 2018 WL 2355299, __A.3d __ (2018), a subcontractor sued the general contractor for payment on a subcontract. The Circuit Court for Montgomery County granted summary judgment in favor of the general contractor. The subcontractor appealed. After proceedings in the Court of Special Appeals the subcontractor sought review by the Court of Appeals.

A pay-when-paid clause is a timing provision in a subcontract that permits the general contractor to delay payment to the subcontractor until it is paid by the project owner or some other reasonable period of time. It does not relieve the general contractor of its obligation to pay the subcontractor for its work. On the other hand, a pay-if-paid clause makes payment by the project owner to the general contractor a condition precedent to the general contractor’s obligation to make payment to the subcontractor. In such case, the general contractor is relieved of its obligation to pay the subcontractor if not paid by the owner.

The case was decided under Virginia law. Maryland and Virginia law are substantially the same with respect to interpretation of such clauses and follow the majority approach. Under the majority approach, a court will construe such a clause narrowly and interpret the payment provision to relate to timing, unless the language clearly requires that it be interpreted as a condition precedent to payment.

The Court noted that generally the credit risk on a construction project is borne by the general contractor. Thus, in order to transfer the normal credit risk (related to collection from the owner) from the general contractor to the subcontractor, the subcontract should contain an express condition clearly demonstrating that to be the intention of the parties.

The Court ultimately remanded the case to the circuit court for further factual development necessary to determine whether the clause at issue was a pay-when-paid or a pay-if-paid provision.

For further information on contract dispute issues please contact: James Schraf at [email protected] or 443-569-0755.