On 30 March 2023, the Enterprise Court of Antwerp issued a significant judgment setting boundaries for the enforceability of back-to-back arrangements in subcontracting for works contracts. Specifically, the court addressed the legality of "pay-if/when-paid" clauses, which may be deemed null and void under certain conditions, violating the Belgian rules aimed at combating late payments and unfair terms in B2B agreements.
Back-to-back arrangements, which involve passing risks and obligations from the main contractor to subcontractors, are prevalent in project finance. These arrangements ensure that the project company, often a special purpose vehicle with limited assets, does not retain uncontrollable risks.
A key element of back-to-back arrangements is often the pay-if/when-paid clause. This clause makes the subcontractor's payment conditional upon the main contractor receiving funds from the employer or lenders. The clause is designed to protect the project company from payment demands by subcontractors when it has not yet received the necessary funds. However, these clauses can push the risk of payment delays onto the financially weaker party—often the subcontractor—rendering them controversial. This is why the use of such clauses is limited or prohibited in some jurisdictions. It was just a matter of time before a Belgian judge would be asked to take a view.
In a case involving a wind farm project, subcontractor C demanded payment for completed work and termination fees from main contractor B. Main contractor B had previously seen its contract with employer A terminated due to B's default. Contractor B refused payment of subcontractor C's invoices, citing a pay-if/when-paid clause, because it had not been paid by employer A.
Subcontractor C challenged the clause's validity, arguing that it contravened:
- Articles 4 and 7 of the Belgian Act on combating payment arrears in B2B transactions (the Payment Arrears Act ), which prohibit excessively long payment terms.
- Article 1798 of the Civil Code, ensuring subcontractors a direct claim against the employer when they remain unpaid by their main contractor.
- Regulations against unfair clauses in B2B transactions under the Economic Law Code.
The court found that the pay-if/when-paid clause did not inherently violate subcontractor C's direct claim rights under the Civil Code. However, it agreed with the plaintiff regarding the other breaches:
- The clause exceeded the permissible 60-day payment period under the Payment Arrears Act, rendering it ineffective.
- The subcontract fell within the purview of the unfair clauses in B2B transactions under the Economic Law Code, which nullifies clauses that unfairly shift economic risks without justification.
Furthermore, the judgment suggested that such clauses could lead to an abuse of law. If the non-payment by employer A resulted from contractor B's own fault and not from any failure by subcontractor C, the condition precedent for contractor B's payment obligation to subcontractor C should be considered fulfilled under article 5.144 of the Civil Code.
This ruling underscores the need for careful consideration of pay-if/when-paid clauses in subcontracting arrangements. It is advised to include a definitive timeframe for payment suspension, and their enforcement must be justified by the subcontractor's own non-performance.
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