The application of 'pay when paid' provisions in construction sub-contract

Abstract

For years, general contractors have often enclosed a contractual provision of “pay when paid” in their subcontracts providing that payment to the subcontractor is conditioned upon the general contractor’s actual receipt of payment from the owner. “Pay-when-paid” clauses while seemingly straightforward at first glance but many are actually ambiguous. Instead of “pay when paid” arrangement waiving the right of the subcontractor to be paid, there is competing argument that this clause speaks to timing of payment. Hence, this research intends to identify whether “pay when paid” arrangement in construction subcontract waiving the right of the subcontractor to be paid or simply a timing mechanism. This research was carried out mainly through documentary analysis of law journals and law reports. Results shows that 8 out of 11 cases identify that “pay when paid” provision in the sub-contract constitute as timing mechanism. “Pay When Paid” provision may become either as timing mechanism and waiving the subcontractor right to be paid. Most of the cases cited that wording of the contractual language in the sub-contract is critical in identify the application of “pay when paid” provis ion. Unambiguously and sufficiently clearly contractual language must have been used in order for a court to construe such a clause imposed payment to the main contractor as condition precedent to the subcontractor’s right to be paid, rather than limiting the time for payment. Once a judge decides that provision is ambiguous there is nothing for the jury to decide or interpret. Therefore, the subcontractor may take the legal action to challenge the enforceability of the clause to seek immediate payment when they have suffering the risk of non-payment due to the performance problems unrelated to their own work.