The use of pay-if-paid clauses in construction subcontracts has long been a point of tension between prime contractors and subcontractors. These provisions condition a general contractor’s payment obligation on receipt of payment from the project owner. They are used strategically by prime contractors to mitigate cash flow risk. The prudence of including or relying on such clauses in construction agreements has increasingly come into question. Courts have scrutinized these provisions under doctrines of fairness, public policy, and statutory compliance, leading to inconsistent enforcement and increased legal exposure. My call! It is NO LONGER prudent (if it ever was) to rely on pay-if-paid clauses as a reliable risk allocation strategy. Recent federal and state case law demonstrates that these clauses are frequently rendered unenforceable, particularly where public policy considerations, the conduct of the parties, or statutory limitations intervene.
The Illusion of Risk Transfer
On face-value, a pay-if-paid clause offers an elegant contractual solution, i.e., if the owner fails to pay the general contractor, then the general contractor has no obligation to pay the subcontractor. This aligns the financial interests of both parties and protects the general contractor from liquidity risk. In practice, courts often refuse to enforce these clauses, particularly where doing so would shield a party from obligations it otherwise bears under principles of equity or public policy. The legal and commercial landscape surrounding these clauses is far from settled, making their enforceability both unpredictable and jurisdictionally dependent.
Judicial Skepticism and the Prevention Doctrine
A recent case from the U.S. District Court for the Eastern District of Pennsylvania illustrates the courts’ growing discomfort with pay-if-paid clauses, especially when the general contractor’s own conduct leads to owner nonpayment. In this case, the general contractor withheld approximately $200,000 from a masonry subcontractor citing a pay-if-paid clause, after the project owner declined to pay due to delays attributable to the general contractor itself. The court declined to enforce the clause, invoking the prevention doctrine. It held that a party cannot rely on a contractual condition it was responsible for frustrating. Where the GC’s own breach prevented satisfaction of a condition precedent (i.e., owner payment), the contractor could not invoke that unmet condition to avoid payment to the subcontractor. This decision underscores the legal limitations of pay-if-paid clauses when they serve as a shield for bad faith or incompetent project management (Truax Law Group, 2025).
Public Policy Constraints in Lien and Bond Contexts
Even when the general contractor is not at fault, courts may still invalidate pay-if-paid clauses that violate public policy, particularly in public construction projects where subcontractors lack meaningful lien rights. New York venues for example, generally disfavor these clauses. The First Department Appellate Division in Entech Engineering, P.C. v. Dewberry Engineers Inc. enforced such a clause only because the subcontractor had no mechanics’ lien rights against a federally funded project. The court reasoned that, in the absence of lien protections, there was no overriding public policy concern precluding enforcement (Entech Engineering v. Dewberry, 2022). While this outcome might suggest conditional acceptance of pay-if-paid provisions, it doesn’t. It reinforces their precariousness. Enforceability turns not on the clause’s clarity but on broader statutory and policy considerations that vary widely by jurisdiction and project type.
Where public bond laws apply, the case for invalidation becomes even stronger. Courts routinely refuse to enforce pay-if-paid provisions that would limit a subcontractor’s access to a payment bond, especially in publicly financed projects. Federal courts have interpreted the Miller Act and comparable state statutes to override contract language that would otherwise prevent subcontractors from recovering on payment bonds. The apparent priority is protecting lower-tier contractors from the very sort of financial uncertainty that pay-if-paid clauses introduce. As the American Bar Association notes, freedom of contract cannot supersede legislatively enacted protections for laborers and materialmen on public works (ABA TIPS Construction Litigation Committee, 2025).
Legislative Bans and the Erosion of Enforceability
Some venues have moved beyond judicial scrutiny to legislative prohibition. The Commonwealth of Virginia enacted a statutory ban on pay-if-paid clauses in 2022, recognizing that the provisions unfairly shift the burden of owner nonpayment to those least equipped to bear it. Similar prohibitions exist in California and North Carolina. New York courts continue to interpret such clauses narrowly, rendering them void in many contexts (Bean, Kinney & Korman, 2023). In such jurisdictions, even carefully drafted pay-if-paid clauses are D.o.A.! This legislative trend signals a broad shift away from private freedom of contract toward mandatory protections for subcontractors and suppliers, further diminishing the utility of these provisions as an acceptable risk management tool.
The Severin Doctrine and Federal Contracting Limitations
The Severin Doctrine imposes an additional limitation on the efficacy of pay-if-paid clauses. Under Severin, a prime contractor can only pass through a subcontractor’s claim to the federal government if it remains liable to the subcontractor. A pay-if-paid clause that extinguishes the GC’s liability effectively bars the subcontractor’s ability to recover through the prime’s claim. Federal courts have been unwilling to allow general contractors to use such clauses to sidestep their payment responsibilities while simultaneously attempting to assert claims on behalf of subcontractors against the government. This not only complicates claim litigation under federal contracts but also undermines any strategic advantage a contractor might have hoped to gain by including a pay-if-paid provision (Best Practices Construction Law, 2022).
Practical Risk and Commercial Downside
Beyond legal enforceability, reliance on pay-if-paid clauses introduces a host of practical risks that render them unattractive. These clauses often sour relationships between general contractors and subs who view them as predatory or disingenuous. They invite costly and protracted litigation over issues of enforceability, fault, and policy, a piss-poor outcome for parties already engaged in complex construction projects. Further, subcontractors may respond by inflating bids to account for payment uncertainty or declining to work with general contractors who insist on such provisions. In competitive markets where reliable subcontractor performance is critical, this can create an ugly disadvantage.
Alternatives to Pay-If-Paid
Rather than rely on legally suspect provisions, GCs should deploy more transparent and balanced risk allocation mechanisms. Pay-when-paid clauses (which defer but do not eliminate payment obligations) are more widely accepted and less likely to be nullified. Alternatively, GCs can require project-specific trust accounts, integrate milestone-based payment protocols, and/or secure subcontractor default insurance to hedge against nonpayment risk. These mechanisms offer predictability without running afoul of judicial or statutory constraints and foster a more cooperative contracting environment.
The legal landscape surrounding pay-if-paid clauses is increasingly inhospitable. Courts scrutinize them under doctrines like ‘prevention’ and ‘public policy’. Legislatures are banning them outright. Federal doctrines like Severin undermine their utility in government work. They are simply NOT a reliable risk transfer mechanism. Pay-if-paid clauses are a source of legal exposure, strained subcontractor relationships, and commercial inefficiency. General contractors who continue to include and rely upon them are inviting problems. Prudence and professionalism demand a better approach to subcontractor payment which effectively (and fairly) aligns with contemporary legal standards, fosters industry trust, and ensures project continuity.
~ C. Constantin Poindexter, MA, JD, CPCU, AFSB, ASLI, ARe
References
Truax Law Group (2025). Pay-if-Paid Clauses: 100% Valid—but Not Absolute. Retrieved from https://truaxlawgroup.com
Entech Engineering, P.C. v. Dewberry Engineers Inc., 2022 N.Y. App. Div. LEXIS 3801 (1st Dep’t)
American Bar Association (2025). Sureties, Pay-If-Paid Clauses, and Subcontractor Protection: Freedom of Contract vs. Public Policy.
Bean, Kinney & Korman (2023). Navigating Pay-if-Paid and Pay-When-Paid Clauses in DC, Virginia, and Maryland.
Best Practices Construction Law (2022). Virginia Bans Pay-if-Paid Clauses: What You Need to Know About Federal Projects.
