Always Check for, Eliminate "Pay-if-Paid" Provisions


Credit professionals find “pay-if-paid” clauses within contracts, especially construction industry-based ones, to be quite the headache at times. It’s why keeping a mindful eye on them ahead of time (re: before granting credit to a would-be debtor) is so important.

Greg Powelson, director of NACM Secured Transaction Services (STS), which administers the Mechanic’s Lien and Bond Services division, has long argued that taking “I’ll pay when [or if] I get paid” as an answer to a collections attempt or something in a contract as “crazy” and unacceptable. Powelson reminded creditors of the importance of reviewing terms to find such unacceptable clause inclusions.

“It’s always scary when court decisions against 'pay-if-paid' are revisited, and it always has to be fought. They’re going to use it again [if a debtor succeeds in getting previous court decision overturned],” he said. “Regardless of enforceability, it’s important to review purchase orders and subcontracts and crossing these terms out of the contract. These kinds of things simply must be identified before extending credit.”

It speaks to the difficulty of navigating the mechanic’s lien process without the potential for a costly gap for businesses extending credit. “Because of the unique nature of mechanic’s lien statutes, all sorts of issues come up from time to time that make things more difficult than they have to be,” Powelson said. “Even if something is unenforceable in the end, credit managers could find themselves expending legal fees to support a position already well-supported by case law.”

It's worth noting the "pay-if-paid" fight is on again, right now in the 10th Appellate District Court of Appeals in Ohio (see tomorrow's eNews edition for more on this story at www.nacm.org).

-Brian Shappell, CBA, NACM staff writer

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