TOO MUCH OF A GOOD THING MIGHT SPOIL THE LOT:

Protecting Texas Contractors from Unenforceable Contingent-Payment

Clauses in Subcontractor Agreements

With the construction, remodeling, demolition, and repair industries still on the recovery track from the economic downturn of 2008, Texas property owners, contractors, and subcontractors are all looking for ways to protect their assets when doing business. Texas contractors, in particular, have taken to using contracts which shift much of the risk of doing business onto subcontractors. When contractors look to incorporate a contingent-payment clause into their subcontractor agreements-that is, when contractors include a provision which conditions their obligation to pay subcontractors on the contractor having first been paid by the owner who hired them, contractors run a risk of voiding that risk allocation, and getting stuck with the subcontractor's tab in the event of an owner's non-payment.

The Texas Business and Commerce Code prohibits the use of contingent-payment clauses to excuse contractors from their obligations to pay subcontractors for work performed, if the owner's non-payment to the contractor is a result of the contractor having failed to live up to the requirements of its own deal with the owner.[1] Simply put, if an owner refuses to pay a contractor because the contractor didn't satisfy its obligations to the owner, a contractor cannot use a contingent-payment clause to then avoid paying subcontractors for their completed work.

Moreover, even if it's not based on a contractor's own issues, a contingent-payment clause in a subcontractor agreement will be unenforceable to the extent that it is "unconscionable," or unfair. To protect itself from an unenforceable contingent-payment clause, Texas contractors must obtain, and provide to the subcontractor prior to the execution of an agreement, certain information which reflects the financial condition of the owner who hired the contractor.[2]

If an improper contingent-payment clause in a subcontractor agreement ends up as the basis for a subcontractor complaint or lawsuit, it is possible that the clause will be unenforceable, and the contractor will be on the hook to pay for the work performed by the subcontractor out of the contractor's own pockets.

Contingent-Payment clauses in subcontractor agreements come with a host of trap-doors and issues. To protect themselves from some of those issues, and to avoid getting stuck with the tab, contractors should always consult an experienced commercial business attorney before entering into contracts with owners and subcontractors.

[1] See, Tex. Bus. & Comm. Code Ann. § 56.051 (West, 2014)

[2] See, Tex. Bus. & Comm. Code Ann. § 56.054 (West, 2014)

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