Contractual "Pay-When-Paid" Clause Upheld
In Universal Concrete Prod. Corp. v. Turner Constr. Co., No. 09-1569, the Fourth Circuit dealt with the issue of the applicability and enforceability of a "pay-when-paid" clause agreed to by a general contractor and its subcontractor.
As stated in the decision: "[W]e believe that under Virginia law, the contract unambiguously reflects both parties' understanding that Universal would only be paid for its work after Turner was paid by the owner." According to the facts in the case, by the time the subcontractor had substantially completed all of its work, the owner could no longer finance the project due to the recent collapse of the real estate market, and the general contractor could not pay the subcontractor because it had not been paid by the owner.
In affirming the decision of the District Court, the Court held that the pay-when-paid clause in the parties' subcontract, incorporated by reference from the prime contract, is enforceable and prevents the subcontractor from demanding payment for its work unless the general contractor is first paid by the owner.
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