Are pay-when-paid clauses (i.e clauses permitting payment to be made by a contractor only when it has been paid by the employer) permitted? Are they commonly used?
The parties are free to agree upon pay-when-paid clauses. However, these clauses are not part of the NS contracts and not commonly used.
Yes, pay-when-paid clauses are permitted, but they are not very common.
In Hong Kong, there currently is no prohibition on including “pay-when-paid” clauses. It is not usual for these clauses to be included in main contracts entitling employers to withhold payment, but they commonly are included in subcontracts (of all levels) to protect the contractor from having to pay its subcontractors where it is not paid by the employer.
However, whilst such provisions are not unenforceable, Hong Kong courts are reluctant to interpret a “pay-when-paid” clause as being a “pay-if-paid” clause (i.e. condition precedent to a right to payment) unless there are sufficiently clear words to this effect. Without such clear words, the court generally will construe such provisions as limiting the time for payment, rather than making a subcontractor’s right to payment dependent on payment upstream.
However, under the proposed SOPL, pay-when-paid type contractual clauses will be rendered ineffective.
Pay-when-paid clauses are prohibited by the HGCRA, except in cases of insolvency of the payer “up the line”, in which case they are permitted.
A “pay when paid” clause is a contract clause that states that the contractor is obligated to pay its subcontractors only following receipt of payment from the owner. General contractors in the United States routinely include such clauses in their subcontracts to avoid cash flow problems by requiring payment to subcontractors only when the contractor is paid by the owner. Thus, if the owner delays payment for four months, the general contractor is not obligated to pay its subcontractors until payment is actually received. Many courts view such a clause as a “timing mechanism,” whereby payment by the owner triggers the timing of when the general contractor must pay its subcontractors. Conversely, if the subcontract does not contain a pay when paid clause, then the subcontractor must be paid within a “reasonable” period of time, or within the time set forth in the contract.
A pay-when-paid clause is generally viewed upon as favorable to subcontractors because the general contractor is deemed obligated to pay the subcontractors even if the owner defaults. A similar yet different type of clause is known as a “pay-if-paid” clause, which shifts the entire risk of owner non-payment to the subcontractor. Thus, under a pay-if-paid clause, subcontractors are paid only if the contractor receives payment from the owner. Both types of clauses are routinely included in construction contracts.
The use of pay-when-paid clauses is not against the law, but hardly anyone succeeds to agree upon the implementation of such clauses. Still, even if such clauses are not agreed upon, it does happen often in practice that employers do behave in such way, as if such clauses were agreed upon.