Pay When Paid Clauses: What Constitutes a Reasonable Time?
In Utah, it is uncertain whether the construction contract contingency payment language is enforceable.
There is a difference between “pay when paid” clauses and “pay if paid” clauses. Pay if paid clauses have been unenforceable for some time in many states. There is no decision from Utah Courts dealing with the enforceability of pay if paid clauses.
However, the majority rule throughout the country provides that if a clause is a pay when paid clause, it is enforceable, but only for a reasonable time. A “reasonable time” is determined according to the relevant circumstances, but in no event shall be less than the time the contractor and subcontractor require to pursue the final conclusion of their legal remedies allowed by law.
What is the take away on the unenforceability of pay when paid clauses? It is likely that a pay when paid clause will be unenforceable when it impermissibly affects or impairs rights of the parties to a construction contract because the duration for payment extends “too long.” However, what is “too long” is not defined in the contract, and neither can be found in the contract terms. The reality is that a “reasonable time”” must be something short of the time that the contractor and subcontractor are required to pursue to conclusion their legal remedies against all parties to the construction contract.
General contractors may want to review and revise their contingency payment clauses found in their subcontracts or master contracts. Also, general contractors and subcontractors may want to review their pay when paid contract clauses for enforceability; and, in going forward, specifically provide for a “reasonable duration” for pay when paid clauses on all future contracts.