Pay-When-Paid Clause and a Slow Owner
You are the prime contractor on a $3.1M renovation of a county-owned building. Your subcontract with a mechanical subcontractor ($410,000) contains a pay-when-paid clause: the sub is paid within seven days after the owner pays you. The owner has paid your progress payment for month three, but you have withheld the sub's $96,000 draw because of a dispute over whether the sub's ductwork changes were within its scope. The sub has stopped work, removed its crew, and sent a letter demanding payment within ten days, citing the state's prompt-payment statute. The project is 60% complete, and the county has threatened to assess delay damages if the mechanical rough-in slips. The sub's contract also contains a 10% retainage provision and a clause making the owner's decision on disputed work final.
1. Analyze the enforceability of the pay-when-paid clause and the sub's prompt-payment claim, and assess your exposure.
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The pay-when-paid clause is a timing mechanism, not a condition precedent to the sub's right to be paid in most jurisdictions-and many states, including West Virginia, limit or void clauses that make payment to a subcontractor contingent on the owner's payment when the owner has already paid the prime. Here the owner has paid your month-three progress payment, so even under a strict reading the condition has been satisfied for the work covered by that payment. Withholding the sub's draw because of a separate scope dispute is not authorized by the pay-when-paid clause; it converts a timing clause into a setoff the contract does not clearly grant.
The sub's prompt-payment claim is strong. State prompt-payment statutes typically require payment within a defined period (often 7–30 days) after the prime receives payment for the sub's work, and impose interest and attorney's fees for wrongful withholding. If the withheld $96,000 includes work the owner has already paid for, you are exposed to the statutory penalty plus the sub's fees.
Your exposure also includes delay damages: the sub's stoppage puts the mechanical rough-in at risk, and the county's delay assessment may fall on you regardless of who caused the stoppage. The "owner's decision is final" clause does not help you against the sub-it governs your dispute with the owner, not the sub's right to payment.
2. Recommend how to resolve the dispute and restructure the payment process to avoid a repeat.
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Immediate resolution. (1) Separate the undisputed from the disputed. Pay the sub the portion of the $96,000 that corresponds to work the owner has paid for and that is not genuinely in dispute-likely the majority-within the prompt-payment deadline. Withholding the entire draw over a partial scope dispute is what triggers the statutory claim. (2) Issue a written position on the disputed ductwork changes within the same window, with the contract provisions and drawings you rely on. (3) Direct the sub back to work on the undisputed scope; a written direction to resume, paired with payment of the undisputed amount, undercuts the sub's justification for stoppage.
If the sub refuses. Escalate to a meeting with the sub's principal and your project manager, document the meeting, and consider a formal demand or mediation per the subcontract's dispute clause. Do not simply let the clock run-interest and fees accrue.
Process fixes. (1) Amend the subcontract to state that pay-when-paid is a timing mechanism only and that undisputed amounts are paid within the statutory period regardless of owner payment; (2) require monthly submittal of a schedule of values with line-item backup so partial disputes do not hold up entire draws; (3) create a written setoff procedure-no withholding without a written notice identifying the amount and basis; (4) track retainage and release it per statute; (5) require the sub to give notice before stopping work, with a cure period, so a dispute does not become a schedule crisis.