the trial court determined that the General Contractor could not have breached the subcontract by failing to pay the Subcontractor. The Subcontractor appealed. The Appellate Court reversed the trial court and found that the pay- ment clause in the subcontract did not contain a condition precedent requiring the General Contractor to be first paid by Owner. Instead, the Appellate Court ruled that the payment clause in the subcon- tract governed only the amount and timing of payments, not the threshold obligation of the General Contractor to compensate the Subcontractor (even if the General Contractor had not been paid by the Owner). In so holding, The Appellate Court applied the following “use- ful framework” for distinguishing between pay-if-paid clauses and pay-when-paid clauses in con- struction agreements: A pay-when-paid clause governs the timing of a contractor’s pay- ment obligation to the subcon- tractor, usually by indicating that the subcontractor will be paid within some fixed time period after the contractor itself is paid by the property owner.... In con- trast, a pay-if-paid clause pro- vides that the subcontractor will be paid only if the contractor is paid and thus ensures that each contracting party bears the risk of loss only for its own work. Applying that framework, the Appellate Court determined that the contractual provision in the subcontract was a pay-when-paid clause, which governed only the timing of payment, and not a pay- if-paid clause, which would have governed the General Contractor’s obligation to pay. In other words, in this case, the Court con- cluded that there was no condi- tion precedent to payment; the General Contractor had to pay the Subcontractor whether or not the Owner had paid. Lessons learned Northshore Center is an illustra- tive case study on the importance of payment provisions in construc- tion agreements being drafted so that they are particularly clear and unambiguous with respect to their pay-if-paid intentions. In our experi- ence, many subcontract agreements in Illinois have payment provisions that do not sufficiently identify that payment by the owner is a condi- tion precedent. As demonstrated by Northshore Center, even language as clear as “to the extent” is inad- equate. Without the “magic word,” i.e. “if,” that makes it clear that the general contractor’s payment obli- gation to its subcontractor exists only “if” payment is made by the owner to the general contractor, the general contractor will likely bear the risk of payment even where the owner doesn’t pay the general con- tractor. The first and best protection against such unnecessary payment BUSINESS TIP ––––––––––––––––––––––––––––––––––––––––––––––––––––––– 32 TileLetter | December 2017