Anyone performing services under a written contract should be familiar with the terms and conditions of the contract he or she executes. The service provider should pay special attention to certain clauses in the contract.
Two areas are of significance in relation to getting paid:
A. Clauses which require you to continue to provide services even if a payment dispute arises with your client
B. Clauses which state your payment is not due until your client receives payment from another party.
A. Payment Dispute Clauses
Many contracts, particularly construction contracts, include language which states that you are required to continue to provide services, even if you have a payment dispute with the paying party. This frequently comes up in relation to a change order or claim for extra payment beyond the base amount due under the contract.
The rationale or justification for such a clause may be that the paying party does not want the job delayed or held up by a payment dispute. With this language you may be required to present your claim through arbitration or litigation after your work on the job is complete, and not to stop working if the payment dispute is not resolved.
If you are asked to sign a contract with such language, you should seek to have the language deleted, or carefully consider if you should be working with that client. Once trust has broken down between the service provider and the client, it will be hard to get agreement on the adequacy of performance and the amount of payment due.
It may also be helpful to have a mediation clause in the contract, which allows a party with a claim to present the claim in mediation, and hopefully resolve it prior to spending money in litigation or arbitration. Mediation may even be available before the job is complete, which could help you collect money due before the lack of payment becomes a financial hardship
B. Payment Condition Clauses
These clauses typically involve a situation in which you perform work for a party which is in contract with the ultimate end user or client, and you are a subcontractor. These clauses will be either “pay-if -paid” clauses, or “pay-when-paid” clauses.
A pay-if-paid clause specifically conditions your payment on payment by the end user. If the end user does not pay the party who hired you, the party who hired you is not liable to pay you.
In 1997, the California Supreme Court held such clauses were not enforceable in California, as an impermissible intrusion on mechanics lien rights. Wm. R. Clarke Corp. v. Safeco Ins. Co. (1997) 15 Cal. 4th 882.
Pay-when-paid clauses identify the timing of payment. Usually, such a clause will state that you will be paid when the person who hired you gets paid. If there is a delay in the person who hires you getting paid, the clause may state that you agree that you are not due your money until the person who owes you the money has had sufficient time to perfect its rights against the ultimate paying party. Sometimes the clause will even state that you agree the reasonable time for your paying party to perfect its rights against the ultimate user is a long period, such as five years.
You should review any contracts you are going to sign and ensure you understand the contract language. If you do not, you should retain an attorney to review the language with you, and present changes to the proposed language, or avoid doing business with the party presenting the bad contract entirely.