Is our 'we pay you when the owner pays us' clause enforceable against the subcontractor?
No, within Chapter 22C. N.C.G.S. § 22C-2 provides that performance by a subcontractor in accordance with the provisions of its contract entitles it to payment from the party with whom it contracts, that payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, 'and an agreement to the contrary is unenforceable'. The clock is statutory: under § 22C-3, when a subcontractor has performed in accordance with the provisions of its contract the contractor must pay its subcontractor, and each subcontractor must pay its own subcontractor, within seven days of receipt by the contractor or subcontractor of each periodic or final payment, the full amount received for that subcontractor's work and materials based on work completed or service provided under the subcontract. Late payment carries interest, but only on a trigger the section states: § 22C-5 provides that should any periodic or final payment to a subcontractor be delayed by more than seven days after receipt of periodic or final payment by the contractor or subcontractor, the contractor or subcontractor must pay its subcontractor interest, beginning on the eighth day, at the rate of one percent (1%) per month or a fraction thereof 'on such unpaid balance as may be due'.
The trap
The exclusion section is the first thing to read, not the last. Section 22C-6 makes the whole Chapter inapplicable to residential contractors as defined in G.S. 87-10(1a), to improvements to real property intended for residential purposes that are exempted from the application of Chapter 83A by G.S. 83A-13(c)(1), and to improvements to real property intended for residential purposes 'which consist of 12 or fewer residential units', so on a small residential job the pay-if-paid clause is not touched by § 22C-2 at all. Second, § 22C-2 kills the CONDITION PRECEDENT, not the contractor's ordinary defences: § 22C-4 provides that nothing in the Chapter prevents the contractor, at the time of application and certification to the owner, from withholding such application and certification to the owner for payment to the subcontractor for unsatisfactory job progress, defective construction not remedied, disputed work, third party claims filed or reasonable evidence that claim will be filed, failure of the subcontractor to make timely payments for labor, equipment and materials, damage to the contractor or another subcontractor, reasonable evidence that the subcontract cannot be completed for the unpaid balance of the subcontract sum, or a reasonable amount for retainage not to exceed the initial percentage retained by the owner. Because § 22C-5 charges interest only 'on such unpaid balance as may be due', whether interest runs on a sum withheld under § 22C-4 is not settled by the text read here. Third, the seven-day clock in § 22C-3 runs from the contractor's RECEIPT of a payment, so it does not itself make the owner pay. Fourth, whether a contract is inside Chapter 22C at all turns on the Chapter's own definitions of 'contractor', 'subcontractor', 'improve', 'improvement', 'owner' and 'real property' in § 22C-1; that section's text is not set out here, so read § 22C-1 before relying on the Chapter.
5 authorities
- statuteN.C.G.S. § 22C-2enactment date not established
The words that state the rule
Performance by a subcontractor in accordance with the provisions of its contract shall entitle it to payment from the party with whom it contracts. Payment by the owner to a contractor is not a condition precedent for payment to a subcontractor and payment by a contractor to a subcontractor is not a condition precedent for payment to any other subcontractor, and an agreement to the contrary is unenforceable.
- statuteN.C.G.S. § 22C-3enactment date not established
The words that state the rule
When a subcontractor has performed in accordance with the provisions of his contract, the contractor shall pay to his subcontractor and each subcontractor shall pay to his subcontractor, within seven days of receipt by the contractor or subcontractor of each periodic or final payment, the full amount received for such subcontractor's work and materials based on work completed or service provided under the subcontract.
- statuteN.C.G.S. § 22C-5enactment date not established
The words that state the rule
Should any periodic or final payment to a subcontractor be delayed by more than seven days after receipt of periodic or final payment by the contractor or subcontractor, the contractor or subcontractor shall pay his subcontractor interest, beginning on the eighth day, at the rate of one percent (1%) per month or a fraction thereof on such unpaid balance as may be due.
- statuteN.C.G.S. § 22C-6enactment date not established
The words that state the rule
The provisions of this Chapter shall not be applicable to residential contractors as defined in G.S. 87 10(1a), or to improvements to real property intended for residential purposes which are exempted from the application of Chapter 83A of the General Statutes pursuant to G.S. 83A-13(c)(1), or to improvements to real property intended for residential purposes which consist of 12 or fewer residential units.
- statuteN.C.G.S. § 22C-4enactment date not established
The words that state the rule
Nothing in this Chapter shall prevent the contractor, at the time of application and certification to the owner, from withholding such application and certification to the owner for payment to the subcontractor for: unsatisfactory job progress; defective construction not remedied; disputed work; third party claims filed or reasonable evidence that claim will be filed; failure of subcontractor to make timely payments for labor, equipment, and materials; damage to contractor or another subcontractor; reasonable evidence that subcontract cannot be completed for the unpaid balance of the subcontract sum; or a reasonable amount for retainage not to exceed the initial percentage retained by the owner.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.