Goodbye To 'Pay When Paid'? Improving Cash Flow In Construction

Author:Mr Tristan Conway-Behan and Martin Cooney
Profession:Arthur Cox
 
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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. Pay when paid or pay when certified clauses make payment of the sub-contractor, by the main contractor, conditional upon payment by the employer and/or certification under the main contract in respect 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 typically used in Ireland tend to tie the sub-contractor's entitlement to be paid to both certification and payment under the main contract.

Both pay when paid and other conditional payment clauses have now been outlawed under 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 Construction Contracts Bill, is that this risk should be taken by the main contractor and should not be passed onto sub-contractors, except in the case of insolvency of the employer.

With the anticipated passage of the Construction Contracts Bill though the Dáil stages later this year, significant changes will be coming down the tracks aimed at improving payment 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...

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