Australia: Contractors: Get what you're paying for, then pay

Last Updated: 29 February 2016
Article by Murray Thornhill

The prohibition against "pay if paid" and "pay when paid" provisions in construction contracts is widely known. Equally well known to contractors is the hardship this often causes where a principal, dissatisfied with a subcontractor's workmanship, withholds payment despite the works being practically complete, perhaps for 120 days or longer.

Often, the contractor knows that, under the Construction Contracts Act 2004, the principal has to make all progress payments, and the final payment, within 50 days of being invoiced. The contractor also knows that, to get paid quickly, they need to apply for adjudication of any payment dispute within 28 days after it arises.

But the contractor does not insist on being paid within 50 days and does not seek adjudication when it is not paid on time, because it depends on good relations with its principal and a good reputation with other principals, to keep winning the work.

So, despite the statutory prohibition, the contractor does not pay for the subcontractor's work until the principal has made its payment under the head contract.

Now, as long as the principal, the contractor and the subcontractor are all solvent and trading and maintaining good relations with each other, there is nothing at all wrong with this arrangement. The Construction Contracts Act does not make it an offence to have a "pay if paid" or "pay when paid" clause in a construction contract (or a verbal arrangement to the same effect). All the Act says about such clauses is that no court or tribunal is allowed to enforce it should it ever be challenged.

So what happens if the subcontractor falls on hard times and insists that the contractor pay when the Act says it must? Or if the subcontractor becomes insolvent and its liquidator insists on timely payment? Or if the relationship between contractor and subcontractor simply breaks down? Will the contractor be forced to pay money it does not have, for work that is not yet fit to hand over to the principal?

Ordinarily, the answer is yes. But HHG Legal Group has devised an innovative solution to this ubiquitous and perennial problem.

First, we considered when construction contractors are entitled to be paid for the work that they do and why. The answer lies in a presumption that the law makes about when principals/head contractors agree to pay contractors for their work. The law presumes that under a lump sum construction contract where the whole of the contract price is agreed to be paid upon practical completion of the whole of the agreed scope of works, minor defects and omissions in the works will not affect the contractor's entitlement to be paid. This is because, unless the contract says otherwise, the principal/head contractor, and the contractor/subcontractor, are presumed to have agreed that once the works have reached the point where they can be used for their intended purpose, the contractor will have earned the lump sum contract price and that becomes payable immediately.

Sometimes, though, this is not what the parties have agreed. If in fact, the principal is not paying the head contractor, and the head contractor is not paying the principal, until the works are absolutely completed and defect free, the contract should say so. This is a simple matter of substituting absolute completion (that is, completion entirely free of defects and omissions to the reasonable satisfaction of the principal) for practical completion, as the stage when the contractor has earned the contract price. The effect of this change will still be that the contractor will not have to pay the subcontractor until it is paid by the principal. But by redefining the event that entitles the subcontractor to be paid from the contractor getting paid (which is prohibited) to the works being entirely complete and free of defects (which is not prohibited), we have made the unenforceable, enforceable.

HHG Legal Group's construction law specialists, Murray Thornhill and Daniel Morris continue to be at the cutting edge of construction law reform in WA.

Answering the call for something to be done about the injustices which subcontractors and homeowners alike face, following the collapse of several recent home builders in WA, HHG Legal Group have made innovative proposals to the WA Building Commissioner for legal reforms which, in the event of home builder insolvency, are designed to:

  1. protect the homeowner's rights to the completion of the home building which they have paid for; and
  2. protect subcontractor's rights to keep working on their part of the home building that they were engaged to do and to be paid what their work is worth.

HHG Legal Group were inspired to come up with these innovative solutions following:

  1. the recent collapse of several home builders in WA, including Capital Works Constructions, Benchmark Designer Homes, Gage Roads Construction and Scho Homes;
  2. the reported rise in home indemnity insurance costs, by 40% over the past three years; and
  3. the Commissioner's current focus on home building indemnity insurance reforms.

Each of these issues have been the subject of various state and federal level government enquiries and law reform proposals. HHG's innovation is to work out a way to bundle up the various reform proposals, into a single, easily implemented package of law reform.

HHG will continue to update its valued followers and supporters in relation to development in this exciting and vitally important area of construction law reform.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Murray Thornhill
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