Responsiveness

APRIL 2012

Construction and Engineering Group Briefing

Goodbye to Pay when Paid?

Improving Cash Flow
Contacts
in Construction
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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.
Tristan Conway-Behan Pay when paid or pay when certified clauses make payment of the
Associate sub-contractor, by the main contractor, conditional upon payment by
Construction and Engineering
+353 (0)1 618 0342
the employer and/or certification under the main contract in respect
tristan.conway-behan@arthurcox.com 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
Martin Cooney
typically used in Ireland tend to tie the sub-contractors entitlement
Associate to be paid to both certification and payment under the main contract.
Construction and Engineering
+353 (0)1 618 0312 Both pay when paid and other conditional payment clauses have now been outlawed under
martin.cooney@arthurcox.com 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
This document contains a general
Construction Contracts Bill, is that this risk should be taken by the main contractor and
summary of legislation and is not a
should not be passed onto sub-contractors, except in the case of insolvency of the employer.
complete or definitive statement of the
law. Specific legal advice should be
obtained where appropriate. With the anticipated passage of the Construction Contracts Bill though the Dil stages later
this year, significant changes will be coming down the tracks aimed at improving payment

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 RESPONSIBILITY FOR INFORMATION UNDER THE PUBLIC WORKS CONTRACTS
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
Dublin
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tel: +353 (0)1 618 0000 | fax: +353 (o)1 618 0618
email: dublin@arthurcox.com
London
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tel: +44 (0)20 7832 0200 | fax: +44 (0)20 7832 0201
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02
APRIL 2012
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.
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tel: +1 (1)212 782 3294 | fax: +1 (1)212 782 3295
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