The Contractual ‘Pay-If-Paid’ Clause – How Broad Is Its Scope?

A pay-if-paid (PIP) clause in a construction contract says “I, the general contractor, will only have to pay you, the subcontractor, if the owner – the guy I contract with – pays me.”  Substitute “when” for “if” in the above example and you have a pay-when-paid clause.  Both of these clauses are standard in multi-layered construction projects (ones that involve multiple contractors and contracts). 

Neither term can be used to defend a mechanics’ lien foreclosure suit, though.  Section 21(e) of the Illinois Mechanics’ Lien Act (770 ILCS 60/21(e)) prevents a general contractor from using pay-if-paid or pay-when-paid provisions as a defense to a subcontractor’s mechanics’ lien claim.  But the terms are valid defenses to regular breach of contract claims. 

BMD Contractors, Inc. v. Fidelity and Deposit Company of Maryland, 679 F.3d 643 (7th Cir. 2012), examines whether a third party (i.e., a guarantor or surety) can use a PIP clause in defense of a subcontractor’s payment bond claim.  Under Indiana law, the answer is yes.

Facts:  When an Indiana manufacturer declared bankruptcy, it caused a chain reaction of defaults starting with the prime contract between the owner and the general contractor and cascading down to lower tier subs.

When the entity that hired plaintiff failed to pay, plaintiff sued the subcontractor’s bonding company under a payment bond.  The bonding company moved for summary judgment because of a PIP clause in the sub-subcontract. 

The bonding company said that since the subcontractor – the bonding company’s principal – wasn’t paid by the general contractor, the subcontractor didn’t have to pay the plaintiff.  The District Court agreed and granted summary judgment.  The plaintiff appealed.

Held: District Court affirmed.


The Court defined a PIP clause as one that provides a subcontractor will be paid only if the contractor is paid by the owner; with each contractor bearing the risk of loss.  By contrast, a pay-when-paid (PWP) clause denotes a timing issue: the general contractor is obligated to pay the subcontractor – but only when or within a fixed time after the contractor is paid by the owner.  (p. 648). 

The Court, looking to other jurisdictions, held that the term “condition precedent” in a construction contract usually signals a PIP provision.  And viewing the unambiguous language of the operative contracts, the plaintiff’s right to  payment was only triggered if the subcontractor was paid by the general contractor.  (pp. 649-650)

Public Policy and Surety (Guarantor) Liability

The Court found that PIP terms don’t violate Indiana public policy reflected by two statutes that (1) prohibit contractual waivers of payment bond claims and (2) prevent conditioning a contractor’s right to record a lien on first receiving payment from a third person.  Indiana Code 32-28-3-16(b), 18(c). 

The Seventh Circuit held that these statutes didn’t apply to whether a contractual PIP term was a defense to a breach of contract suit.  Based on Indiana’s strong policy favoring freedom of contract, and because no statute outlaws PIP provisions as a breach of contract defense, the PIP term didn’t violate public policy. BMD at 652.

Summary judgment for the bonding company was also proper based on the general rule that a surety’s (the person guaranteeing another’s debt) obligations mirror those of its principal.  A surety can have no greater liability than its principal (the person whose debts are being guaranteed). 

In Indiana, payment bonds and the contracts they secure are construed together.  BMD at 654.  And since the subcontractor didn’t have to pay the plaintiff unless the subcontractor was paid by the general contractor, the bonding company’s obligations weren’t triggered and it didn’t have to pay the plaintiff.


(1) if a contract contains “condition precedent” (to payment) or similar language, this will signal a pay-if-paid clause and it will present a valid defense to a breach of contract suit;

2) lower-tier subcontractors should actively monitor the financial health of  the project so they aren’t caught off-guard by an owner’s or higher-tier contractor’s default.                                                       




Landlord’s Property Manager Direct Examination (Commercial Lease)

witness stand (photocredit: google images;

Here’s an outline of the direct examination I’ve used in commercial lease eviction cases at trial representing a landlord.  Assume a commercial tenant who has defaulted under a commercial lease and I’ve called the lessor’s property manager to testify concerning the lease, the 5-day notice, the tenant ledger, the lease guarantee and to provide damages testimony.

Necessary documents/exhibits: (1) Lease and Guaranty, (2) 5-day Notice, (3) Tenant Ledger, (4) Management Agreement (contract between owner and property manager that authorizes property manager to collect rents and to prosecute forcible action if tenant breaches lease); (5) Fee petition (assuming lease contains fee-shifting language); and (6) any legally significant correspondence (i.e. a lease termination notice).  Obviously, at trial, I often have to deviate from my script but this hopefully provides a useful outline of key topics.

Also – some of the  questions are leading and may have to be rephrased.  My experience though is most judges give some latitude in the interest of streamlining the examination.

Q: State name

A: “I’m Patricia Property Manager” 

Q: Where are you employed?

A: “I’m the Vice President of Leasing for Property Managers, Ltd.”

Q: What are your day-to-day duties?

A: “I handle rent collections and billing for various tenants and am the liaison for tenants on all of our shopping center properties”

Q: Are you familiar with the property that is the subject of this lawsuit?

A: “Yes”

Q: How so?

A: “The property is one of my assigned assets.  I’m in charge of collecting rents for this property and dealings with the tenant”

Q: Where is the property located?

A: “125 Main Street,  Store No. 2 S, Pine Acres shopping mall”

Q: Can you describe that property please?

A: “Yes It’s in a strip mall outside of downtown and contains 11 different retail businesses.”

Q: Are you familiar with the tenant and defendant in this case?

A: “Yes, the tenant operates a financial services franchise in Unit 2-S in the mall.”

Q: What is your company’s relationship to Property Owner?

A: “We’re  the owner’s property manager”

Q: Is your company authorized to collect rents on this site?

A: “Yes”

Q: How do you know that?

A: There’s a written management agreement between the owner and our company for us to manage the property

[Show Management Agreement – Ex. 1]

Q: Do you recognize this document?

A: Yes

Q: What is it?

A: “It’s the property management agreement between the owner and us”

Q: have you seen this before?

A: “Yes”

Q: In what context have you seen this?

A: “This management agreement is part of our lease file.  It’s the governing document between us and the property owner/landlord that allows us to manage the property and collect rents”


Q: Showing you what’s been marked as Exhibit 2 – do you recognize this?

A: “Yes”

Q: What is it?

A: “It’s the written lease for the property involving the tenant and defendant”

Q: What is commencement date and end date of the Lease?

A: “January 1, 2010 is the start, the end date is January 1, 2020″

Q: Do you recognize the signatures on the Lease?

A: “Yes”

Q: How so?

A: “The person who signed for the landlord is one of the property owners; the person who signed for the tenant is the president of the tenant’s company”

Q: Do you (or does your company) keep records of rents charged and owing under this lease?

A: “Yes”

Q: Describe to the court how you track rents

A: “We input them into our computer database and update our internal records with each payment.  We regularly send the tenant a regular ledger showing current amounts owed and past amounts paid”

Q: Have you reviewed [Name of Property Mgmt company] books and records pertaining to this Lease and Property

A: “Yes”

Q: What, in general, do those books and records consist of?

A: “The lease, correspondence, guaranty, tenant ledger, any default notices, etc.”


Q: Do you recognize this

A: Yes

Q: What is it

A: It’s the default notice we sent to the tenant after it failed to pay rent

Q: Is this the type of document you’ve seen before?

A: Yes.  It’s the typical default notice we send out to a defaulting tenant

Q: Do you know how this notice was served on the Tenant

A: Yes – certified mail

Q: Do you know when it was served

A: June 5, 2017

Q: How do you know?

A: Because we received the green card certified mail receipt which showed that the tenant received and signed for the notice on that date

[Note – be prepared to show the certified mail receipt to the witness and argue that it gets in under judicial notice, business record or public record – e.g. print-out from usps site.Q: How much did the Tenant owe on the date of this 5-day notice

Q: Has Tenant made any payments since the date of this notice

A: No


Q: Do you recognize this?

A: Yes

Q: What is it?

A: It’s the Tenant Ledger

Q: Is this a document you’ve seen before?

A: Yes – it’s the standard ledger we use for all tenants to track lease charges and payments

Q: What information is contained on here?

A: It’s a written itemization of rent payments made and owed as well as other lease charges?

Q: What’s the source of these figures?

A: It’s based on payments received and charges made as entered into our leasing data software program.

Q: Is this prepared and kept in the regular course of [Property Mgr’s] business?

A: Yes

Q: For what purpose?

A: To be able to provide tenant and us with a current statement of amounts due

Q: As Vice President of Leasing who has responsibility for the account with the tenant-defendant, do you have personal knowledge of lease payments due and owing from this tenant as well as payments made?

A: Yes

Q: Is the Tenant current on its lease payments

A: No

Q: Why do you give that answer

A: Because the tenant hasn’t paid rent for the past three months

Q: Is the tenant still in possession to your knowledge?

A: Yes

Q: How much does the Tenant owe through today?

A: $16,500

Q: How did you arrive at that number?

A: Rent is $5,000 a month, plus late fees and CAM reimbursement

Q: And are those numbers on this tenant ledger

A: Yes

Q: How much does the Tenant owe through the end of the Lease term?

A: $150,000

Q: Explain how you calculated that

A: I multiplied monthly rent times number of months left on the lease and added CAM and real estate tax reimbursement charges


Q: Showing you what’s been marked as Exhibit 5- do you recognize this

A: Yes

Q: What is it?

A: It’s the lease guaranty signed by Tom Tenant – the company president

Q: Is this a type of document you’ve seen before in your capacity as VP of leasing?

A: Yes – we require personal guarantees from some of our corporate tenants

Q: Did you ever notify the Guarantor that the Tenant was in default under the Lease

A: Yes.

Q: When

A: the same date we sent the notice.  We copied Tom Tenant with the notice

Q: have you received any payments from the Guarantor since notifying him of the Tenant’s breach

A: No

“Your honor, I move to admit Exhibits 1-5 into evidence.  I have nothing further”

Contractor’s Material Breach of Construction Contract Dooms Mechanics’ Lien and Breach of Contract Claims

In Kasinecz v. Duffy, 2013 IL App (2d) 121329-U, an August 2013 Second District case, a contractor suffered a three-pronged defeat in his lawsuit against a homeowner.  The Court affirmed the lower court’s bench trial judgment for the homeowner on the contractor’s breach of contract, mechanics’ lien and quantum meruit claims.

Facts: This is the second appeal involving the parties.  In 2004, defendant hired plaintiff to build a house pursuant to a verbal agreement which was later formalized in a written contract.  The contract required the plaintiff to submit invoices to defendant before defendant was obligated to pay plaintiff.  Kasinecz, ¶ 20.  Over several months, the plaintiff and his crew built part of the house until a payment dispute arose.  Plaintiff walked off the job and sued for breach of contract, mechanics lien foreclosure and quantum meruit.  The trial court entered a directed finding for the homeowner half-way through the first bench trial (because the contractor materially breached by failing to furnish a statutory lien waiver, among other reasons) and plaintiff appealed. 

In the first appeal, the Second District reversed on the ground that it was unclear whether defendant homeowner requested a sworn statement and because the factual record was too scant to uphold judgment in total for the defendant.  Kasinecz, ¶ 6.  On remand, the trial court received additional witness testimony and written submissions and again entered judgment for defendant.  This time, the Second District affirmed.

Reasoning: The Court sided with the homeowner on all three of the contractor’s claims. 

(1) Breach of Contract: the contractor materially breached (and therefore, couldn’t prove that he performed) the contract by not providing invoices to the defendant as required by the contract.  Kasinecz, ¶¶ 21-23.  The contractor admitted at trial that he didn’t supply invoices until after he walked off the job.  Since the contractor breached, he couldn’t prevail on his breach of contract claim.   

(2) Mechanics’ Lien claim:  The contractor lost his lien claim because he didn’t substantially perform.  A necessary condition to mechanics lien recovery is substantial completion of the contract.  Id., ¶ 25; Fieldcrest Builders, Inc. v. Antonucci, 311 Ill.App.3d 597 (1999)(note: Fieldcrest provides a thorough discussion of substantial completion/quantum meruit issues in the context of a construction case).  Here, the Court found there were holes in the roof, no windows or doors were installed, and the house lacked interior mechanical systems and finishes.  Id., ¶¶ 25-26.  Because the house was so incomplete when plaintiff and crew stopped work, plaintiff couldn’t show substantial performance.  This doomed his mechanics’ lien count.  Id., ¶ 25.

(3) Quantum meruit – the Court also rejected plaintiff’s quantum meruit claim based on the black-letter principle that quantum meruit recovery won’t apply where an express contract governs the parties’ relationship.  Kasinecz, ¶ 29; Installco Inc. v. Whiting Corp., 336 Ill.App.3d 776 (2002).  Since plaintiff and defendant had a written (express) contract for plaintiff to build defendant’s house, this defeated plaintiff’s quantum meruit count.  The fact that plaintiff couldn’t enforce the contract (since he breached it) doesn’t matter: the contract’s existence alone defeats the quantum meruit claim.  Kasinecz, ¶ 29.

Law of the Case.  The plaintiff contractor argued that the Second District’s reversal in his favor on the first appeal was law of the case to the trial court on remand and even moved for summary judgment immediately upon remand.  Id., ¶¶ 7, 14-15.  The law of the case doctrine provides that questions of law actually determined in a prior appeal are binding on the trial court on remand as well as on subsequent appeals. Id., Kreutzer v. Illinois Commerce Comm’n, 2012 IL App (2d) 110619.  Both the trial and appeals court found that the law of the case rule didn’t apply because the issues decided in the first appeal (whether the parties had an oral contract and whether the contractor provided statutory lien waivers) differed from the second appeal’s salient issues (whether plaintiff submitted invoices to defendant and whether plaintiff substantially performed).  Kasinecz, at ¶¶ 15, 20.  

Take-aways: A material breach will preclude contractual recovery; a contractor’s failure to substantially perform will doom a mechanics’ lien suit; and quantum meruit and a breach of express contract claim are mutually repugnant: they can’t co-exist.  The Court did appear to express surprise that the contractor didn’t argue that the homeowner waived strict compliance with the contract’s invoicing requirement.  The defendant made several progress payments to the plaintiff without first receiving invoices.  This would seem to give rise to a waiver of strict compliance argument.  However, since the contractor never argued waiver, the Court didn’t tip its hand as to how it would rule on the issue.