by KELVIN NG CY (FSIArb) (MCIArb)
Advocate and solicitor in the High Court of Malaya
Adjudicator under the KLRCA panel
To what extent ‘pay when paid’ clause applies to construction contracts?
“The Main Contractor shall make payments to the Sub Contractor within x no. days from the date they receive payment from the Employer”
The example above is an all too familiar clause found in many construction contracts from the main contractor to its subcontractors. It fundamentally provides that the Sub Contractor will get his payment only upon the Main Contractor getting paid from the Employer. In the construction industry, this is known as a “pay when paid” clause.
It makes the Sub Contractor’s right to being paid conditioned upon the Main Contractor receiving the payment from the Employer, usually in respect of the Sub Contractor’s portion. If the Employer does not pay the Main Contractor, then the Sub Contractor’ cannot insist on his right to get paid.
Such clauses put tremendous risk on the Sub Contractor. They have already undertaken the resources to perform the subcontract work. Now they are forced to bear the risk of not getting paid if the Employer fails to pay or delays payment to the Main Contractor, or worse, goes into liquidation.
With the introduction of the Construction Industry
Payment and Adjudication Act 2012 (CIPAA), ‘pay when paid’ clauses may be a thing of the pass. Section 35 of CIPAA provides:
“35. Prohibition of Conditional Payment
1) Any conditional payment provision in a construction contract in relation to payment under the contract is void
2) For the purposes of this section, it is conditional payment provision when:
a) the obligation of one party to make payment is conditional upon that party having received payment from a third party; or
b) the obligation of one party to make payment is conditional upon the availability of funds of drawdown of financing facilities of that party.”
Thus, section 35 of CIPAA makes ‘pay when paid’ clauses invalid in construction contracts. And following recent judicial sentiments, the Main Contractor cannot insist on contracting out of CIPAA. However, in light of a recent Court of Appeal decision in Bauer (Malaysia) Sdn Bhd v Jack-in Pile (M) Sdn Bhd (Civil Appeal No. B-02(C)(A) -1187-06/2017) CIPAA will only affect construction contracts that are entered into after its effective date, 15th April 2014. [the author disagrees with the decision and reasoning in Bauer – for in depth analysis on this, the author will publish his views separately at www. vil.com.my]
Thus, if a construction contract was entered into prior to 15th April 2014 and contains a ‘pay when paid’ clause, then it would be effective. For construction contracts entered after 15th April 2014, all ‘pay when paid’ clauses are void and the Sub Contractor can rely on the protection afforded under section 35 of CIPAA.