Potential Change for “Pay-if-Paid” and “Pay-when-Paid” Clauses in Michigan

To understand the difference between the two contractual clauses, it is important for general contractors and subcontractors to know the following;

  • A “pay-if-paid” clause makes payment of the general contractor by the owner a condition precedent to the subcontractor getting paid—meaning if the general contractor does not get paid—neither does the subcontractor.
  • In contrast, a “pay-when-paid” clause is a mechanism that delays the time in which a general contractor must pay a subcontractor, but never totally extinguishes the responsibility.

Under current Michigan law, a contract may contain a “pay-if-paid” clause stating that the subcontractor will be paid only after the general contractor is paid. Given pay-if-paid provisions are enforceable, there is reason to believe that Michigan courts would also enforce a pay-when-paid provision addressing the timing of the contractor’s payment obligation.