What are paid when paid provisions and how are they relevant in the construction industry?
Delays in payments are endemic in the construction industry all over the world. With global reports concluding that the construction industry is most affected by delays with 65% of stakeholders having experienced delayed payments. Extensive research has shown that delayed payments in the construction industry have four major outcomes:
- cash flow problems,
- increase in disputes,
- insolvency and bankruptcy, and/or
- delays and cost overruns in projects.
One reason for delayed payments in the construction industry that particularly affects Subcontractors, is the ‘pay-if-paid’ and ‘pay-when-paid’ clauses included or implied in construction contracts. These broadly imply that the main Contractor will be liable to pay the Subcontractor if and when he is paid by the Employer.
All Australian States and Territories prohibit “pay when paid” provisions in the relevant Building and Construction Industry Security of Payment Acts for each jurisdiction (“SOP Act”).
By way of example the Victorian legislation provides at section 13:
“Effect of pay when paid provisions
- A pay when paid provision of a construction contract has no effect in relation to any payment for—
- construction work carried out or undertaken to be carried out under the contract; or
- related goods and services supplied or undertaken to be supplied under the contract.
- In this section—
“money owing”, in relation to a construction contract, means money owing for—
- construction work carried out under the contract; or
- related goods and services supplied under the contract;
“pay when paid provision” of a construction contract means a provision of the contract—
- that makes the liability of one party (the first party) to pay money owing to another party (the second party) contingent on payment to the first party by a further party (the third party) of the whole or any part of that money; or
- that makes the due date for payment of money owing by the first party to the second party dependent on the date on which payment of the whole or any part of that money is made to the first party by the third party; or
- that otherwise makes the liability to pay money owing, or the due date for payment of money owing, contingent or dependent on the operation of another contract.
Therefore, if a provision is deemed a “pay when paid” provision, section 48 of the Victorian SOP Act operates to void such provision.
Pay when Paid provisions were considered by the High Court in Maxcon Constructions v Vadasz (2018) 264 CLR 46 . In that case it was held that linking a right for a subcontractor to have retention released to achieving an occupancy certificate under the head contract was void as a “pay when paid” provision.
The relevant test is whether a provision of a contract makes liability to pay the money contingent or dependent on the operation of another contract.
The above test was applied in Lal Lal Wind Farms Nom Co Pty Ltd as agent for the Lal Lal Wind Farms Partnership v Vestas – Australian Wind Technology Pty Ltd & Max Tonkin  VSC 807. In this case Stynes J applying the above test found that the liability to pay money under one agreement was contingent or dependent on the operation of another agreement determining whether practical completion had been obtained.
Specifically, Stynes J noted:
- the parties to the two agreements are different; and
- the purpose of the agreements differ.
Her Honour held that one of the agreements provided for an entitlement to issue an invoice contingent on the operation of another contract, and therefore is captured by section 13(2)(c) of the Victorian SOP Act.
Why should you care?
You should care because the courts will implement and apply the above test regarding “pay when paid” clauses despite clear drafting of contract terms indicating when payment is to accrue.
You should carefully consider contract drafting to ensure you do not unintentionally fall foul of the prohibition of ‘pay when paid’ provisions. This is important particularly in complex contractual arrangements, where referring to other contracts may be considered a contingency or dependency, and therefore by captured by the prohibition under the relevant SOP Act.
This will include provisions relating to when retention amounts are released to subcontractors. Provisions relating to the release of retention under a subcontract contingent on an event under a head contract are void under the ‘pay when paid’ prohibition.
We are here to help
CML Lawyers is a commercial law firm in Sydney and Cowra with specialist expertise in construction law.
Support and assistance from experienced construction lawyers can make all the difference to your project and business. If you need assistance reviewing contracts to ensure those documents comply with the relevant SOP Act, call as for advice.