17 June, 2021
A 'pay-when-paid' clause is a payment condition that establishes a reasonable time for the contractor to comply with its duty to make payment to a subcontractor or supplier upon the contractor's receipt of payment from the owner. Essentially this clause governs the timing of a contractor's payment obligation to the subcontractor.
A 'pay-when-certified' clause offers a suite of protections, pursuant to which a third party is used to certify that the project company has been paid, and once such third party has certified that the project company has been paid, the subcontractor is paid.
The change to the law has now rendered 'pay-when-paid' clauses to be ineffective and the only exception to this prohibition is when a 'pay-when-paid' clause is used and a third party, or any other person, payment by whom is a condition under the contract, is insolvent. A clause however will be invalid if it makes payment conditional on:
This is to prevent a party up the line from relying on circumstances relating to its own contract to delay payment under a separate contract.
The act has no longer permitted 'pay-when-certified' clauses within contracts. This change is set to try and result in fewer delays in payment reaching a sub-contractor. There is however an exception to this prohibition where the works are to be carried out by a third party under a sub-contract or similar arrangement.
Payment clauses will need to redrafted to reflect these changes. When preparing your contract, any 'pay-when-paid' clause should be carefully drafted to be unambiguous. The clauses must be drafted to reflect the current terms of the legislation including the current legislation on insolvency and the possibility that the legislation may change. A failure to do so could render an effective 'pay-when-paid' clause ineffective.
This can be a complex area and for contractors and/or sub-contractors it is always worth ensuring your contracts have effective payment provisions within them. Where a payment provision is deemed ineffective, parties can agree other terms for payment otherwise the Scheme provisions will apply as per Part II of the Schedule to The Scheme for Construction Contracts (England and Wales) Regulations 1998. This situation is not one to be taken lightly and to ensure non-payment is avoided, the Commercial team at Forbes Solicitors can draft and/or review your construction contracts.
For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.
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