A subcontractor agreement includes a pay-when-paid clause. The owner becomes insolvent and cannot pay the general contractor. Under this clause, what is the general contractor's obligation to pay the subcontractor?
Correct Answer
B) The contractor's obligation to pay is suspended indefinitely
A pay-when-paid clause makes the general contractor's obligation to pay subcontractors conditional upon receiving payment from the owner. If the owner becomes insolvent and cannot pay, the contractor's obligation is suspended, shifting the risk of owner non-payment to the subcontractor.
Why This Is the Correct Answer
A pay-when-paid clause creates a conditional payment obligation where the general contractor only has a duty to pay subcontractors after receiving payment from the owner. When the owner becomes insolvent and cannot pay, this condition is not met, which legally suspends the general contractor's obligation to pay the subcontractor. This clause effectively transfers the risk of owner non-payment from the general contractor to the subcontractor. The suspension continues indefinitely until and unless the owner makes payment.
Why the Other Options Are Wrong
Option A: The contractor must pay within 30 days regardless of owner payment
This contradicts the fundamental purpose of a pay-when-paid clause, which specifically makes payment conditional upon the contractor receiving funds from the owner, not subject to arbitrary time limits.
Option C: The contractor must pay but can seek reimbursement from the owner later
This describes a pay-if-paid scenario without the conditional clause protection, where the contractor would still be obligated to pay regardless of owner payment status.
Option D: The subcontractor must sue the owner directly for payment
While the subcontractor may choose to sue the owner, this is not a requirement under the pay-when-paid clause, and the clause doesn't mandate direct legal action against the owner.
Memory Technique
Think 'Pay-WHEN-Paid = WHEN owner pays, THEN I pay. No owner payment = No sub payment.' The word 'when' creates the condition.
Reference Hint
Florida Construction Law chapter on subcontractor agreements and payment clauses, or Business and Finance chapter covering contractor-subcontractor relationships
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