Pay-When-Paid and Pay-If-Paid Clauses in Texas Construction Contracts

What is the difference between the two clauses?

A pay-when-paid clause says the general contractor will pay the subcontractor within some period after receiving payment from the owner. Courts read it as a timing provision: it fixes when payment is due, and if the owner never pays, the general contractor must still pay within a reasonable time. A pay-if-paid clause says the owner's payment is a condition precedent to the general contractor's obligation to pay at all. If the owner never pays, the subcontractor is never owed. The difference is the words: a pay-if-paid clause must clearly express that the subcontractor assumes the risk of the owner's nonpayment, usually with the phrase "condition precedent."

Texas statute uses one term for both. A contingent payment clause under Business and Commerce Code chapter 56 is a provision that makes the general contractor's payment to the subcontractor contingent on the owner's payment, and the statute applies its limits whether the clause is framed as timing or as risk.

Is a pay-if-paid clause enforceable in Texas?

Yes, as a general rule, when it is clearly written. Texas has not voided these clauses as some states have. Chapter 56 instead sets five situations in which the general contractor, called the contingent payor, cannot enforce the clause against the subcontractor, the contingent payee.

1. The nonpayment is the contractor's fault. The clause cannot be enforced to the extent the owner's nonpayment resulted from the contractor's failure to meet its own contractual obligations, though it remains enforceable to the extent the nonpayment resulted from the subcontractor's failures (§ 56.051). A general contractor whose defective concrete caused the owner to stop paying cannot pass that to the electrical subcontractor.
2. The subcontractor objects. After the 45th day following its written request for payment, the subcontractor may send the contractor a written notice objecting to further enforcement of the clause. The notice takes effect on the latest of the tenth day after the contractor receives it, the eighth day after Prompt Payment Act interest begins to accrue on the owner's overdue payment, or the eleventh day after Government Code interest begins on a public project. Work performed and materials delivered after that date are no longer subject to the clause (§ 56.052(a), (b)). The contractor can block the notice by sending its own written notice, within a short window, that the owner's nonpayment stems from a dispute over the subcontractor's own work (§ 56.052(c)). Once the subcontractor is paid the debt that prompted the notice, the clause revives for later work (§ 56.052(e)).
3. Sham relationship. The clause cannot be enforced where the contractor and the owner are in a sham relationship as the lien statute defines it, for example when the owner controls the contractor (§ 56.053).
4. Unconscionability. The clause cannot be enforced if enforcement would be unconscionable, with the burden on the party asserting it (§ 56.054(a)). The statute then gives contractors a safe harbor: enforcement is not unconscionable if, before the subcontract became enforceable, the contractor exercised diligence in checking the owner's financial viability and the adequacy of financing, told the subcontractor in writing, and later either made reasonable collection efforts or assigned its claim against the owner to the subcontractor with reasonable cooperation (§ 56.054(b)). The statute spells out what information counts as diligence for private, state and federal projects, and the owner must supply it within 30 days of a request or the parties are relieved of their duty to proceed (§ 56.054(d)–(g)).
5. Liens. A contingent payment clause may not be used to invalidate the enforceability or perfection of a mechanic's lien (§ 56.055). The subcontractor's claim against the property survives even if its contract claim against the general contractor is suspended.

The chapter's protections cannot be waived by contract (§ 56.004), and the contingent payment clause is an affirmative defense the general contractor must plead and prove (§ 56.056). Chapter 56 does not reach contracts solely for design services, for civil works such as roads, bridges, utilities and water or wastewater facilities, or for a detached single-family residence, duplex, triplex or fourplex (§ 56.002); those contracts are governed by common law.

Example

Suppose a Dallas glazing subcontractor's subcontract makes the owner's payment a condition precedent to its own. The subcontractor submits a $140,000 pay application on March 1. The owner stops funding the project in April because of a lender dispute unrelated to anyone's work. On April 16, more than 45 days after the request, the subcontractor sends the general contractor a written notice objecting to further enforcement of the clause. The general contractor has no basis to send a counter-notice because there is no dispute about the glazing. Ten days later the notice is effective: everything the subcontractor installs after that date is owed by the general contractor regardless of what the owner does, while the $140,000 for earlier work remains subject to the clause, and the subcontractor perfects a lien for all of it.

What should a subcontractor do when the clause is invoked?

• Read the clause. If it lacks clear condition-precedent language, argue it is pay-when-paid and payment is due within a reasonable time.
• Ask the general contractor in writing why the owner has not paid. If the reason is the contractor's own performance, § 56.051 applies.
• Calendar day 45 after each pay request and send the § 56.052 objection notice for ongoing work.
• Request the owner financial information the statute describes; a contractor who cannot show diligence loses the unconscionability safe harbor.
• Perfect the lien on schedule regardless of the clause. Texas mechanic's lien deadlines has the dates.
• Decide whether to keep working. The notice protects future work; it does not require the subcontractor to continue if the contract allows suspension.

What should a general contractor do to keep the clause enforceable?

Use clear condition-precedent language, perform its own obligations so nonpayment cannot be traced to it, give the written financial viability disclosure before the subcontract is signed, respond to any § 56.052 notice within the statutory window when the owner's nonpayment concerns the subcontractor's work, and pursue the owner diligently or assign the claim. A general contractor that did none of this will find the clause provides little protection when the owner fails.

How does this interact with other payment rights?

The Prompt Payment Act's seven-day rule applies once the owner does pay: a contractor who has received the owner's money for the subcontractor's work must pass it on within seven days with interest after that, and the contingent clause is no defense. Subcontractor rights when the general contractor was paid covers that situation. The Construction Trust Fund Act also treats the owner's payment as trust funds for the subcontractors. And on public projects the subcontractor's payment bond claim under Government Code chapter 2253 is a separate route not conditioned on the owner paying the general contractor. Payment bond claims on Texas public projects explains it.

Tina Wysk represents subcontractors and general contractors in contingent payment and other construction payment disputes in Dallas–Fort Worth.