Pay when paid and pay when certified clauses developed within the construction industry to deal with the risk of the ultimate employer failing to make payment to the main contractor for works undertaken, and essentially providing that, should this happen, neither the main contractor nor its sub-contractors would be paid. Pay when paid or pay when certified clauses make payment of the sub-contractor, by the main contractor, conditional upon payment by the employer and/or certification under the main contract in respect of the sub-contract work. Such clauses operate on the principle that a main contractor should not become liable to pay his sub-contractor for work carried out until after such time as he has received payment from his client. This necessarily involves a sub-contractor affording a longer credit period to the main contractor than the main contractor, in turn, gives to the employer. The standard forms of sub-contract typically used in Ireland tend to tie the sub-contractor's entitlement to be paid to both certification and payment under the main contract.
Both pay when paid and other conditional payment clauses have now been outlawed under legislation in the UK and we are about to take a similar step in this jurisdiction. Arguably, at its most basic level, a pay when paid clause is simply a matter of risk allocation, the risk being non-payment by the employer. The argument apparently accepted by the UK parliament in enacting both the Housing Grants Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009 (which have outlawed conditional payment clauses) and also the view of the Irish legislature in the proposed Construction Contracts Bill, is that this risk should be taken by the main contractor and should not be passed onto sub-contractors, except in the case of insolvency of the employer.
With the anticipated passage of the Construction Contracts Bill though the Dáil stages later this year, significant changes will be coming down the tracks aimed at improving payment practices within the construction industry. The impetus behind the proposed legislation has arisen primarily out of the current downturn in the economy which has, in turn, led to many sub-contractors having difficulties getting paid on projects and meeting their own debts as they fall due. The Bill introduces a number of provisions which aim to improve payment mechanisms in construction contracts (which will include design professional appointments) and core provisions will be implied, by statute, into construction contracts if not already adequately provided for.
A key change is the prohibition of all conditional payment provisions.
"a provision in a construction contract is ineffective to the extent that it provides that payment of an amount due under the construction contract, or the timing of such payment, is conditional on an act of a person other than one of the parties to the construction contract".
This provision will bring to an end to the process whereby the risk of a default by an employer is passed on to sub-contractors. The legislature has sought to deal with the issues in an expansive fashion, hence the language used in the provision is very broad. Not only does this language prohibit "pay when paid" and "pay when certified", it also extends to instances where a contractor might seek to make payment conditional upon securing financing or funding, or a third party satisfying some other criteria i.e. the reaching of a milestone on a programme. However, this provision will not apply in an insolvency situation where the "other person" has become insolvent/bankrupt.
This prohibition on conditional payment clauses needs to be considered in the context of the other statutory provisions included in the Bill aimed at improving payment mechanisms in construction contracts. Standard form contracts generally have detailed provisions relating to payment, including interim payments, due dates and so forth, and the Bill simply places these on a statutory footing. However, in so doing, the Bill also sets out certain minimum requirements and introduces new protections to secure effective cash-flow down the contractual chain. All construction contracts will be required to provide for the amounts of interim and final payments, or for an adequate mechanism for determining those amounts, together with the payment claim dates for each amount due under the contract. Where adequate mechanisms are not included, the provisions of the Schedule to the Bill will apply, which provide for interim payments at intervals of no greater than 30 days. In addition, where a paying party does not agree any part of a payment claim made under the contract, written details of this must be provided to the other party no later than 21 days after the payment claim date, failing which, the amount claimed must be paid in full.
Where payment is not made by the due date, a statutory right to suspend works will be available (such an entitlement appears already in many standard forms). The innocent party will have the right, on giving no less than 7 days' written notice, to suspend the performance of their obligations under the construction contract, without prejudice to any other right or remedy that party may have under the relevant construction contract. The right to suspend performance ceases once payment is made in full but, as currently drafted, a suspension cannot continue for more than 14 days, even if payment has not been made. This latter restriction contained in the Bill seriously undermines the protection which this right of suspension is intended to provide.
Finally, the Bill anticipates the introduction of a statutory right to refer disputes relating to payment to fast track adjudication, which if made binding in the interim and afforded appropriate judicial support, will provide real payment protection to those providing works and services in construction.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.