A subcontract agreement includes a pay-when-paid clause. The owner becomes insolvent and cannot pay the general contractor. What is the subcontractor's legal position?
Correct Answer
B) The pay-when-paid clause becomes void due to impossibility
Courts often find pay-when-paid clauses unenforceable when payment becomes impossible due to owner insolvency.
Why This Is the Correct Answer
Courts generally treat pay-when-paid clauses as timing mechanisms, not as risk-shifting devices that permanently eliminate the subcontractor's right to payment. When owner insolvency makes payment impossible, courts frequently hold that the condition (receipt of owner payment) cannot be fulfilled, making the clause void under the doctrine of impossibility. The subcontractor retains the right to seek payment from the general contractor.
Why the Other Options Are Wrong
Option A: The subcontractor can demand immediate payment from the general contractor
While the subcontractor may ultimately have the right to payment, demanding 'immediate' payment without legal process overstates the subcontractor's position. The legal path requires demonstrating that the pay-when-paid condition has been voided by impossibility — it is not an automatic trigger for immediate collection.
Option C: The subcontractor can only seek payment from the payment bond
Limiting the subcontractor to payment bond claims only is too narrow. A payment bond is one avenue of recovery, but it is not the exclusive remedy when a pay-when-paid clause is voided. The subcontractor may pursue the general contractor directly once impossibility voids the condition.
Option D: The subcontractor must wait indefinitely for payment
Requiring indefinite waiting would effectively convert a pay-when-paid clause into a pay-if-paid clause, eliminating any guarantee of payment. Courts generally refuse to interpret pay-when-paid clauses this broadly because it would unjustly eliminate the subcontractor's right to compensation for completed work.
Memory Technique
Pay-when-paid = WHEN (timing), not IF (condition). If 'when' becomes 'never' due to insolvency, the courts say the clause is void — the contractor still owes the sub.
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