Understanding Conditional Payment Clauses in Construction Contracts

By: Matthew Jane

In the construction industry, payment timing and responsibility are critical concerns—especially for subcontractors who often depend on prompt payment to manage cash flow and complete ongoing projects.

The inclusion of conditional payment clauses in contracts for private construction projects has become increasingly widespread. These clauses are often referred to as “pay if paid” or “pay when paid.” A “pay if paid” clause states that a subcontractor will be paid only after the general contractor is paid. Such a clause is generally permissible in Michigan, subject to certain limitations. Conversely, a “pay when paid” clause delays the time for the general contractor to pay a subcontractor, until the general contractor is paid.    

Michigan Cases Addressing Conditional Payment Clauses

The Michigan Court of Appeals has upheld the applicability of pay-if-paid clauses. In Berkel & Company Contractors v Christman Co, 210 Mich App 416 (1995). There, Berkel (a subcontractor) sued the construction manager (Christman) for payment. Christman denied liability because it had not been paid by the owner. According to the court, the contract clearly provided that all payments to the subcontractor were to be made only from equivalent payments received by Christman for the work done, “the receipt of such payments by the Christman Company being a condition precedent to payments to the subcontractor.” As a result, the court ruled that Christman was not required to pay Berkel until Christman received payment from the owner because under Michigan law, failure to satisfy a condition precedent prevents a cause of action for failure of performance. The court specifically rejected Berkel’s argument that payment was merely delayed “for a reasonable period of time” because the contract contained no language limiting the condition precedent to any “reasonable time.”

In an unpublished opinion in 2015, Macomb Mechanical, Inc. v LaSalle Group, Inc, the Court of Appeals held that a pay-if-paid provision in the subcontract might not apply to compensation for extra work. The parties had not executed a change order and it had to be determined at trial if the additional work became part of the subcontract and thus governed by the pay-if-paid clause. If the extra work was not part of the subcontract, the default payment time is “a reasonable time.”

The takeaway is that to create an enforceable “pay if paid” provision, the contract language must have clear and unambiguous language stating that the contractor’s receipt of payment is a condition precedent to paying a lower tier subcontractor. With that said, there are limits to the enforceability of a “pay of paid” clause. A contracting party who prevents or renders impossible the satisfaction of a condition precedent may not relay on that condition to defeat liability. Further, damages for delays that were not within the contemplation of the parties, or actions or interferences that caused an unreasonable delay that are beyond the scope of the contract, might not be subject to a “pay if paid” provision. 

Statutory Authority

Michigan has a prompt payment law, known as Public Act 279 of 1984, that applies to public projects financed by a state, county, city, township, village or other public agency. The Act typically applies to contracts that are at least $30,000 or provide for more than 3 payments. The general rule is that payment is due within 30 days of invoice approval, but this can be extended to 15 days after receiving funding from another state or federal agency if that is later. In addition, state departments must pay for goods and services within 45 days, unless otherwise agreed. However, certain public projects, such as those contracted by state transportation, school districts, or state housing development authorities, may be exempt from these provisions.

Michigan does not currently have a specific prompt payment law for private projects, though there have been legislative efforts to introduce a law. In June 2023, House Bill 4837 was introduced. If enacted, this “prompt payment” bill would, among other things, result in the unenforceability of pay-if-paid clauses and impose a penalty on “late” payments “wrongfully withheld” at 12% per year accruing “on the day after the required date and ending on the date the payment amount due is paid.” House Bill 4837 is still pending in committee.

If you are a contractor, subcontractor, or construction project owner operating in Michigan, understanding how conditional payment clauses can affect your rights and responsibilities is essential. The language of your contract could determine when—or even if—you receive payment. To ensure you're protected and compliant with current and evolving laws, consult an experienced Ann Arbor construction lawyer at Pear Sperling Eggan & Daniels, P.C. before entering into or enforcing any payment clause.