Is a pay-when-paid clause allowed in my subcontract?
Usually not: for most construction work, the law makes a pay-when-paid clause ineffective unless someone further up the chain is insolvent.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
The answer
A pay-when-paid clause makes your payment depend on your main contractor being paid by someone else, usually its client. Where your subcontract is a construction contract, section 113 of the Housing Grants, Construction and Regeneration Act 1996 makes that clause ineffective. The exception is where that someone, or a party further up the chain, is insolvent. Since 2011, section 110 also treats a payment term as inadequate if it depends on obligations under another contract being met. The same applies if it depends on someone deciding they have been met, with limited exceptions. Where a clause fails, other payment terms take its place. But you still have to argue the point while your money is late. Watch for clauses that are not labelled, too. Payment on receipt of the main contractor's certificate, or a set period after the client pays for your package, can do the same work. Whether the Act covers your subcontract, and what a particular clause does, is a question for your solicitor. The commercial answer is simpler. Before you sign, ask for fixed payment dates instead. They cost your main contractor nothing to agree now, and cost you time and money to argue for afterwards.
Example
Illustrative example. The scenario and figures are invented.
The facts
A cladding subcontractor is sent a £920,000 subcontract. It makes each payment due 7 days after the main contractor is paid by its client for the cladding.
What happens
- The subcontractor finds the clause under the heading Payment Terms. A second clause ties the release of its retention to the client.
- It writes replacement wording: a due date 7 days after each application, and a final date for payment 28 days after that.
- It sends the clause to its solicitor and the replacement wording to the main contractor.
The outcome
The main contractor accepts fixed dates for the interim payments. The subcontractor signs, and its payment no longer waits on the client.
To have clauses like this found and rated, and the replacement wording written before you sign, see our Pre-Signing Contract Review service.