Conditional payment refers to money that is only paid when certain requirements or conditions are fulfilled.
Oftentimes, subcontractors have to deal with the risk that the owner will not be able to meet payment obligations. This is because many contractors have found conditional payment clauses to be useful in passing this on to them.
In this situation, a contractor can say that unless the owner issues the payment, the subcontractor will not be paid for the resources or work done. Even if the subcontractor wishes to receive payment within a certain period of time, if the owner has not issued payment, then the subcontractor will not receive anything. It could get worse if the owner does not pay at all, because it means the subcontractor will never receive anything.
Therefore, even though the main obligation for payment of the owner is to the main contractor, by not paying, the owner is essentially passing on the burden to a third party.
Because of this, subcontractors have come to see conditional payment clauses as undesirable elements in the contracts they encounter, and have been moving to fight against the imposition of these. As a result, such clauses are now the subject of controversy and are even considered invalid in some territories.
Because of the apparent injustice that conditional payment clauses pose, many countries have found ways to protect the rights of subcontractors. One way of doing this is by giving subcontractors the right to receive payment directly from the employer. Also, securities have been set, in order to protect subcontractors from the risk that the contractor may become insolvent.
