Many subcontracts provide that the subcontractor is not entitled to payment until the owner has paid the contractor. Does this mean that if the owner never pays, the subcontractor never gets paid? No, according to most courts.
Subcontract forms mislabeled "Standard Subcontract Agreement" commonly in use often contain language stating that payments will not be made to the subcontractor until the contractor has received payment from the owner. The language itself seems clear-if the contractor doesn't get paid, his subcontractor doesn't get paid.
It is not unusual for owners to fail to fully pay their contractors. Nonpayment may result from the owner going broke, from a dispute over some aspect of the contractor's work, or as a result of the owner's unjustified refusal to pay the contract balance.
Although the language of the subcontract provisions might be interpreted to require that the subcontractor will not be paid unless the contractor is, many courts have ruled otherwise.
Instead, those courts have ruled that the clause merely affords the contractor a reasonable time within which to make reasonable efforts to collect from the owner. If the contractor fails in those efforts, he must nevertheless pay his subcontractor. The theory behind this rule is that the subcontractor contracts with the contractor and the contractor is obligated to pay for the subcontractor's work. The risk of non-payment is thus borne by the contractor rather than his subcontractor.
The effect of the no-pay-subcontractor-unless-owner-pays clause in the states which have adopted that rule is that the clause merely postpones the time for payment to the subcontractor. Thus, the subcontractor must wait until the contractor has exhausted reasonable efforts to collect from the owner. The period of this delay might be measured by the time it takes the contractor to complete his litigation with the owner and recover on his judgment. That time may be shorter if the owner is bankrupt and thus there is little possibility that the contractor will ever collect.
What rule might be adopted in those states, like Colorado, which do not have ruling cases on this issue is uncertain. The courts of those states may choose to follow the majority rule discussed above or adopt the minority rule which holds that the subcontractor is not entitled to payment unless the contractor gets paid-because that is what the contract says.
Because of the uncertainty in the law of many states and the possible delaying affect upon payment to the subcontractor (even should those courts adopt the majority rule), subcontractors should pay careful attention to the payment language of their subcontracts. If possible, they should avoid any language making payment to them contingent upon the owner's payment to the general contractor.
On the other hand, contractors should likewise be entitled to protect themselves. A measure of protection might be a subcontract clause which provides that the contractor will have a reasonable time within which it may attempt to collect from the owner and that the subcontractor agrees to cooperate in such efforts by providing witnesses, documentation and other support necessary to sustain the contractor's payment claims against the owner. Contract language which so provides would comport to the court-made law of a number of states and the result would be fair to all parties.