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Contract troubleshooting

Compiled by Tanya Olckers with technical input from Alex Goddard, MDA Attorneys

Have you come across the ‘paid when paid’ clause as a subcontractor? Here is what it means and how it affects you.

The ‘paid-when-paid’ clause can cause a legal headache.
The ‘paid-when-paid’ clause can cause a legal headache. Wayhomestudio |

The ‘paid when paid’ clause can cause some stick for a subcontractor. Boiled down, it means that payment due to the subcontractor for work done only becomes due when the contractor actually receives payment from the employer and then can pay the subcontractor. A variation on this is the ‘paid if paid’ clause, which leaves the subcontractor stranded if the contractor doesn’t receive payment.

It is clear how this clause can cause problems for the subcontractor. This is why it’s vital to go through any contracts with a fine-tooth comb. The general rule is that if you have to sign it, you have to read it.


Typically, what you’ll see in regard to this clause is:

“Payment to the subcontractor shall be subject to the contractor having received payment from the employer of the amount certified in its interim payment certificate and become due for payment by the contractor to the subcontractor upon receipt of such payment by the contractor from the employer.”

According to Alex Goddard, an associate at MDA Construction & Technology Attorneys, the way this is broken down is like this: “‘Paid if paid’ means that you as a subcontractor will get paid only if the employer pays the contractor,” he says. “‘Paid when paid’ means your payment will only become due once the contractor has been paid.”

What this means is that no one gets paid until the employer or client pays the contractor. This can become quite complex if the subcontractor decides to pursue a legal remedy to secure payment due to them.

This can result in cash flow issues for the subcontractor and can mean a possibly indefinite amount of delay in receiving payment, but the contractor might choose to wait to inform the subcontractor that payment has not yet been received.

“I can’t pay you because I haven’t been paid,” is something that subcontractors are very accustomed to hearing. However, “paid when paid” is really not the only way to do business.

“The payment terms are dictated by the terms of the contract,” says Goddard. “The “paid when paid” arrangements are the payment terms which would have been agreed to by the parties in executing the contract. Practically, a paid when paid arrangement can be envisioned through an example: imagine you ordered new plants for the outside of your house, but expected the nursery to anticipate payment only once you managed to sell your property. The logical response is, “that’s not fair”. These arrangements are generally unfair, yet a significant number of subcontracts include this arrangement.”

Goddard points out that several years ago, there was a proposal to introduce prompt payment regulations in South Africa which would have outlawed ‘paid when paid’ clauses. This was never implemented. In some parts of Australia and in the UK, it is an illegal practice.

In order for the subcontractor to get paid (with the paid-when-paid clause), the following steps need to be completed first:

  1. the subcontractor completes work on an interim basis
  2. they make an application for certification
  3. they have their works certified
  4. they transmit a tax invoice detailing the amount certified and
  5. finally, once the employer makes payment to the contractor, the contractor will then process payment to the subcontractor.
  6. If you, as the subcontractor, suspect that the contractor has already been paid, but is holding out on paying you, you now have to hunt for evidence that the contractor has been paid. This may mean going directly to the employer to get confirmation.

What do you do now?

So, what happens if you have not received payment or payment is severely delayed – and you’ve signed the contract with the paid-when-paid clause?

Unfortunately, this means you need to get yourself to court. While this may sound like something you would rather avoid, it’s best to discuss this with your lawyer and look into adjudication as an avenue to enforce payment.

“A new low-value dispute adjudication model has been developed by CAASA (Construction Adjudication Association of South Africa) with MDA director Vaughan Hattingh,” says Goddard, “This may be suitable to your subcontracting arrangement. While the process does require time and costs, it may be quicker and cheaper than fighting in court.”

If you find yourself in this position, don’t wait: take action as soon as possible.

“As construction specialists, we find that subcontractors spend a few months trying to follow up payment,” says Goddard, “You can rely on follow up via calls and messages for a couple of weeks, but then take decisive action to pursue the outstanding payment with a qualified attorney. You may find that there is a reason for why payment is being withheld and you can quickly rectify it once you are aware of this on your side.”

There is often a conflict between the terms proposed by the subcontractor in its quotation, and the contractor in its purchase order or the subcontract agreement which is issued. This conflict can create confusion and ambiguity. For example, a subcontractor provides a quote for the work which includes payment terms – say seven days after certification. A purchase order is issued, which states that payment term is 30 days. If you were expecting payment in seven days but it takes longer, these payment terms can wreak havoc on your cash flow, especially if you have debt obligations to suppliers.

Ensure that you carefully fill out the contract data if it appears in your contract. For example, there is a dispute resolution clause in the JBCC standard form contract which requires subcontractors to select either adjudication or arbitration should a dispute arise. If you don’t select one of the two options, the default action is to go to court, and litigation is much more expensive than adjudication and arbitration.

Negotiate your subcontracts properly with amendments that mitigate the risk of a strict ‘paid when paid’ situation. If the contractor is reluctant to consider this kind of amendment, it may be a greater risk for the subcontractor to take on.

What clauses should you look out for?

Is there a ‘pay when paid’ clause? It is essential to have clear payment terms that allow for meeting your payment obligations to suppliers and labour.

Establish when your retention money is going to be certified and paid. Given that the employer generally withholds a portion of the contract value until after all possible snags are satisfactorily resolved, you need to know what the contractor has agreed to. Your portion of the work may occur right at the beginning of a project with a five-year period. Depending on the contractor’s agreement with the employer and your subcontract, the subcontractor may be in a situation where payment is only due after six years.

Does the contract outline what process is to be followed in the event of a dispute?

Does your contract include the right to suspend or terminate if there is a breach such as non-payment or a lack of construction information necessary for you to complete the work?

“The most important right you have is to be paid for what you have done,” asserts Goddard, “If you can’t negotiate anything else in the contract, ensure that you are clear on this issue. Attempt to agree to amendments with the contractor. In addition, look into the financial position and payment history of the contractor.”

There is no legislation in South Africa to protect subcontractors against ‘paid when paid’ clauses. The reality is that SA law is under-developed in this particular respect. This could be because the amounts in dispute might not justify the cost of trial. This means there isn’t much case law on this. 

There are four standard form contracts used in the construction sector and one of these, the JBCC (Joint Building Construction Committee) is commonly used in subcontracting.


Five tips to ensure a better outcome

  1. Become familiar with your subcontracts and the standard form subcontracts used regularly.
  2. Properly negotiate subcontracts to ensure you mitigate risks. If the contractor is unwilling to negotiate, the risk may not be worth it.
  3. Ensure that your payment terms with suppliers and labour align with the payment terms of the contractor. There is always a domino effect.
  4. Be proactive in managing your subcontract and enforcing your rights. Ensure that clear communication is addressed to the contractor in this regard when required.
  5. When making any major decision, always get external advice to ensure that what you have in your mind is in the contract. Construction law specialists are important!
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