Since time immemorial, or at least, for quite some time, “pay when paid” clauses have been void in construction contracts.

But everyone knows what that means right?

It means that the liability of one party to pay the other isn’t contingent on that party first being paid by someone else. In effect, it prevents a trickle down of liability and putting contractors and subcontractors in impossible or near-impossible situations requiring them to satisfy conditions outside their own contract just to be paid for work they have otherwise completed satisfactorily.

But what about less obvious circumstances?

It isn’t uncommon, particularly in contracts for large construction projects, for Contractors and Head Contractors to import as much of the responsibilities and obligations contained in their Contracts into their subcontracts. Often this is done by importing, by way of significant and onerous terms, the entire of the obligations and liability to a subcontractor.

Combined with significant amendments to the Australian Standard on which the contract and subcontracts are based, it can difficult without legal assistance to truly work out all the terms of the Contract or Subcontract you are given.

Importing these obligations and linking them to payments can be a recipe for disaster if not done carefully, because “pay when paid” provisions also include provisions within contracts where the liability to make a payment is contingent not just on payment under another contract, but on the operation of another contract.

Take, for example, a term by which the payment of retention by a Head Contractor to a Subcontractor is made subject to the Head Contractor first obtaining a certificate of occupancy and all other approvals required for the building, despite the Subcontractor only performing a portion of the works required to complete the project and obtain the certificate and approvals required.

Such a term is certainly convenient to the Head Contractor, as it keeps the Head Contractor flush with security that may be necessary to fix or complete a part of the works required to obtain their final sign off under the Head Contract.

But such a clause may well be void because, in order to obtain the certificate of occupancy, work other than the work done by the Subcontractor has to be completed and it would likely fall within the expanded definition of a “pay when paid” provision as it relies on the operation of (but not payment under) the Head Contract, which requires all works be completed and not just the Subcontractors, before the Subcontractor is paid.

The take-away?

Getting construction contracts reviewed can help you avoid disputes later, and properly understand what the Contract requires you do, how and when you get paid, and what might prevent you from being paid in full and on time (and how to avoid it).

If you would like to discuss the review of your contract with WGC Lawyers, please don’t hesitate to contact us of 4046 111.