Pay When Paid Clauses in Construction Contracts

A “pay when paid” clause seeks to provide that a contractor will only pay a subcontractor for completed work once the contractor has received payment from the employer.

Fortunately, for those doing the work and awaiting payment, there is limited scope for pay when paid clauses to apply to effectively resist payment.

Under the Construction Act 1996, a pay when paid clause will be ineffective except in circumstances where the employer who is making the payment is insolvent (this is known as “upstream insolvency”).

For a party seeking to rely on a pay when paid clause to avoid payment, it is essential that the clause clearly identifies identify the ways in which the employer will be classed as insolvent and trigger the clause.  The Court will construe a clause narrowly and will not rescue the party relying on the clause from a lack of clarity in the drafting.

If a pay when paid clause has been rendered ineffective then, unless the parties have agreed other terms of payment, the relevant provisions of the Scheme for Construction Contracts 1998 apply.

Due to the relative clarity in the legislation, pay when paid clauses are rarely considered by the Courts.

In Shepherd Construction Limited v William Hare Limited [2010] EWCA Civ 283, the Court of Appeal confirmed that the pay when paid clause was not effective and therefore that WHL were entitled to be paid by SCL, despite the fact that the employer was insolvent and could not pay SCL for the works.

The Court of Appeal’s judgment did not put an end to pay-when-paid clauses and a properly drafted clause will be enforceable. However, a party seeking to rely on such a clause will need to make sure a pay when paid clause (and indeed, any clause which seeks to exclude / limit liability) is clear and unambiguous.

This guidance also applies to non-construction contracts. Any clauses attempting to exclude or limit lability will be looked at strictly against the party seeking to rely on them.  Even if there seems to be something wrong with the drafting, a Court will not interfere with the contract, sticking to its general principle that a party will only be able to limit its liability if it uses clear words to do so.

Berry Smith is regularly instructed on both sides of payment disputes in all forms of contract. We have a variety of teams who can assist with debt recovery, commercial or construction contracts. Should you wish to discuss any form of payment dispute, please do not hesitate to contact  

Cerys Laskey – Solicitor

Tel – 029 2034 5511