Pay-When-Paid vs. Pay-If-Paid

Pay-when-paid and pay-if-paid clauses are two distinct contingent-payment mechanisms used in construction subcontracts to allocate the risk of owner non-payment between the prime contractor and its subcontractors. The clauses look superficially similar but have very different legal effects. Texas courts have recognized both clause types but distinguish them carefully, and in practice the Prompt Payment Act's 7-day downstream payment rule (Property Code Ch. 28) limits how far the contingency can be pushed.

Pay-when-paid (timing provision)

A pay-when-paid clause is interpreted as merely setting the timing of payment, the subcontractor will be paid within a reasonable time after the prime contractor receives payment from the owner. If the owner ultimately does not pay, the subcontractor is still entitled to payment from the prime contractor; the prime simply has a reasonable additional time to obtain funds from another source. Texas courts default to a pay-when-paid construction unless the contract very clearly establishes a condition precedent.

Pay-if-paid (condition precedent)

A pay-if-paid clause attempts to make owner payment a true condition precedent, if the owner never pays, the subcontractor is never entitled to payment. The Texas approach: such clauses are enforceable, but ONLY if drafted with unambiguous condition-precedent language. Common enforceable patterns: "Receipt of payment from the Owner is an express condition precedent to Subcontractor's right to payment" or similar. Generic "pay when paid" or "pay only when received" language defaults to the timing construction.

Prompt Payment Act overlay

Once the prime contractor receives payment from the owner, the Prompt Payment Act (Property Code Ch. 28) mandates payment to the subcontractor within 7 days. The contingent-payment clause cannot extend this statutory floor. The interaction matters: a pay-if-paid clause may shift the risk of owner non-payment to the subcontractor, but it cannot delay payment beyond the 7-day window once funds are received. Multi-tier flow-down is similarly capped.

Texas case law trends

Texas courts have generally enforced pay-if-paid clauses when drafted with sufficient clarity, but several decisions have struck down clauses where the contract language was ambiguous, where the contractor's own breach contributed to non-payment, or where the clause conflicted with statutory protections. Recent Texas appellate decisions have recognized contingent payment unenforceability where the prime contractor's failures caused the owner's non-payment, treating that as a self-induced condition.

Lien rights preserved

Importantly, neither pay-when-paid nor pay-if-paid clauses eliminate the subcontractor's mechanic's lien rights against the property. The subcontractor's lien remedy is independent of the contractual right to payment from the prime contractor; the lien attaches to the owner's property based on the labor or materials supplied. A subcontractor with a valid lien can foreclose against the property even if a pay-if-paid clause defeats the contractual claim against the prime contractor.