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?

Construction

Belgium Small Flag Belgium

In subcontracts the use of pay-when-paid clauses is very common as a part of the so-called back-to-back nature of the contract, meaning that the rights and obligations of the main contractor towards the employer are deemed to apply to the subcontractor to the same extent (as if he were the main contractor). In this logic, it is the right of the main contractor to receive payment that triggers the right of the subcontractor to payment for works executed.

Oman Small Flag Oman

Omani law imposes no restriction as to the payment terms that can be agreed between the parties. Pay-when-paid clauses are not uncommon in construction contracts in Oman and should be enforceable in accordance with Article 655 of the CTL.

Denmark Small Flag Denmark

Pay-when-paid clauses are not uncommon in Danish construction contracts.

In a ruling from 2015, an arbitration tribunal found, in a dispute between a main contractor and a sub-contractor regarding a claim for additional work, that it was irrelevant that the contract contained a clause stating that claims for additional work would only be honored to the extent that the employer paid and accepted the claim.

It cannot be concluded that “pay-when-paid” clauses are generally void, as the specific circumstances of the case are not described in detail in the case summary, and it is not clear why the arbitration tribunal found the clause irrelevant, but “pay-when-paid” may be disregarded as unreasonable.

Spain Small Flag Spain

Yes, they are permitted but they imply relevant tax consequences that need to be taken into account.

Indonesia Small Flag Indonesia

For construction contracts especially in the private sector, Indonesian laws and regulations are silent with regard to this specific matter. Therefore, the general provisions of freedom of contract under Indonesian contract law will prevail and consequently pay-when-paid clauses are permitted if the parties contractually agree to this.

For construction contracts funded by APBN, the Ministry of PWPH standard form contract (which may be used as a reference), contains a clause regulating the payment for the performance of the work. There is a model-clause that states that the request for payment from the Service Provider to the Service User must be supported by evidence of payment to its sub-contractors according to the progress of the work.

Mexico Small Flag Mexico

These kind of clauses were not used until recent years. However in recent private projects, they have been included. Since they are not forbidden, there is no issue on including them and there has been no judicial decision stating their illegality or alike.

Colombia Small Flag Colombia

Although pay-when-paid clauses are not prohibited under Colombian law, yet they are not commonly used in building contracts.

Switzerland Small Flag Switzerland

“Pay-when-paid”-clauses are permitted, but not commonly used in practice.

Australia Small Flag Australia

Security of payment legislation in all jurisdictions renders void "pay-when-paid" clauses in contracts for the performance of construction works, or supply of related goods and services, in Australia. A recent High Court of Australia decision, Maxcon Constructions Pty Ltd v Vadasz [2018] HCA 5 confirmed this position. It clarified that a pay-when-paid provision will have no effect if it "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".

Norway Small Flag Norway

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.

Sweden Small Flag Sweden

Yes, pay-when-paid clauses are permitted, but they are not very common.

Hong Kong Small Flag Hong Kong

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.

United Kingdom Small Flag United Kingdom

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.

United States Small Flag United States

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.

Serbia Small Flag Serbia

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.

UAE Small Flag UAE

Yes.

Pay-when-paid clauses are commonly used in the UAE and are enforceable.

Employers often include provisions within the construction contract which require the Contractor to verify that all resulting payments have been made to subcontractors, or to permit the Employer to examine the financial records of the Contractor.

Germany Small Flag Germany

While pay-when-paid clauses are not illegal under German law, they are not commonly used in building contracts. They are deemed to be invalid if used in standard business terms (section 305 ff. BGB).

Austria Small Flag Austria

Such clauses are permitted and are customary. However, court jurisprudence in Austria requires general contractors to use their best efforts to urge their client to make payments.

France Small Flag France

These clauses are not common and their validity is in our view questionable under French law.

Greece Small Flag Greece

Given that the general payment rule set out in Art. 694 of the GCC referred to above is soft law, pay-when-paid clauses are not prohibited under Greek law. Such term is often part of a general back-to-back contractual arrangement between the employer, the main contractor and the latter's subcontractor(s). However, such clauses should be reasonable and within the boundaries of the general principles of civil law and most importantly, the principle of good faith, otherwise risking unenforceability. Notwithstanding the above, where the contractor fails to make timely payments to its employees, the latter are entitled to demand payment of their accrued wages directly from the employer (702 GCC).

Saudi Arabia Small Flag Saudi Arabia

There is no prohibition of pay-when-paid clauses in private sector contracts but we cannot comment whether they are widely use.

Malaysia Small Flag Malaysia

The common law position in Malaysia draws a distinction between pay-when-paid clauses and pay-if-paid clauses. The former merely fixes the time for payment but does not absolve any liability to pay. The Malaysian Courts have however been reluctant to enforce such conditional payment clauses.

Section 35 of CIPAA renders void any conditional payment provision under a construction contract entered into after 15.4.2014.

Updated: October 16, 2018