"So, where's my money?" – The Pay-when-Paid Clause Dilemma
Background
Imagine this. A, B and C are the employer, contractor and sub-contractor respectively. They enter into a business proposition where A, being the Employer, asks B to install a machine while B sub-contracts it to C to complete the installation. The employer would pay the Contractor and after being paid, the Contractor then pays the Sub-Contractor the agreed portion or sum. Halfway during the installation of the machine, the Employer is unable to pay the Contractor the money for the installation. The Contractor is then unable to pay the Sub-Contractor because he was not paid by the Employer in the first place. To make matters worse, the Sub-Contractor has spent much of his time and money to install the machine. Not surprisingly, the Sub-Contractor then demands from the Contractor the money owed to him but the Contractor replies simply that he will only pay the Sub-Contractor if he gets paid by the Employer. The Sub-Contractor now asks, "So, where's my money?". Recent cases in the Court of Appeal examined this issue.
When pay-when-paid clause is construed as a mere provision imposing a time limit for payment
In the case of Antah Schindler v Ssangyong1, the plaintiff was a sub-contractor while the defendant was the main contractor employed by the employer for installation of lifts in a building project. The plaintiff did its job and were promptly partially paid except for a few interim certificates which amounted to more than RM1 million.
The plaintiff relied on a clause in sub-contract agreement that the payment was to be made by the defendant as certified by the architect within 14 days of the receipt of the architect's certificate by the defendant. The said clause reads as, "that payment in respect of any work, materials, or goods comprised in the sub-contract shall be made within 14 days after the receipt by the Contractor (defendant) of payment from the Employer against the architect's certificate..."
The defendant contended that the main contract was also incorporated into the sub-contract and that it had been mutually agreed and understood by the parties that payments would be made to the plaintiff after the defendant had received payments from the employer in accordance with the 'pay–when-paid' clause.
The Court of Appeal cited a New Zealand case2 and held that the clause was a mere provision imposing a time limit for payment. This is because there was no express provision mounted into the clause which imposed any restriction over the rights of the plaintiff to pursue its claim against the defendant. If parties intended otherwise, they should have included in their agreement clear and unambiguous conditions which have to be fulfilled before a sub-contractor has the right to be paid, and not merely a clause governing the time for payment.
On that basis, since it was not unambiguously expressed in the clause, the Court of Appeal disagreed that the 'pay-when-paid' clause disallowed the plaintiff from pursuing a claim against the defendant, on account of there being no bar preventing it.
When pay-when-paid clause is construed as a condition before payment
I. Asiapools3
The Court in a later case Asiapools have decided differently from Antah Schindler. In Asiapools, the plaintiff was a nominated sub-contractor engaged to build a swimming pool for a condominium. The defendant had earlier entered into a main contract with the employer to build the condominium. The plaintiff completed its job but was not paid fully by the defendant, as the employer had not paid the defendant.
The plaintiff contended that pursuant to the sub-contract, the final payment claimed by the plaintiff was outside the 'pay-when-paid' clause expressed in the sub-contract as it referred to 'progress Payment/interim payment' only. The said clause reads as, "... the payment in respect of any work, 75% material or goods comprised in the sub-contract comprised in the sub-contract shall be made to the sub-contractor within 14 days after receipt by the Main Contractor (defendant) of payment certified as due in the Interim Certificate...". The defendant refuted that argument and argued that the clause covered final payment as well.
The Court of Appeal decided that the clause is sufficiently wide to include the final payment claimed by the plaintiff. It was also decided that the clause is clear enough in that the payment for the sub-contract works can only be made upon receipt of such payment by the defendant from the employer. However, the court also (like in Antah Schindler)stressed that a 'pay-when-paid' clause will be entirely a matter of construction, requiring clear and unambiguous words, and requiring careful consideration of whether, on a true construction, the clause affects the right to payment or only the time for payment.
II. Bina Jati4
Interestingly, the most recent Court of Appeal case of Bina Jati decided to follow the decision of Asiapools. In this case, the plaintiff is claiming from the defendant the balance of the progress payments based on the value of the sub-contract works. The defendant relied on the 'pay-when-paid' clause claiming that liability to pay the plaintiff has not arisen as the defendant itself had not received payment from the employer. The said clause reads as, "Within seven (7) days of receipt by the Contractor (defendant) from the employer of the amounts included under on Architect's Certificate ... the Contractor shall notify and pay to the Sub-Contractor the total value certified therein...".
The Court of Appeal stated that an agreement would have to be clear beyond doubt that the agreement was conditional and not merely governing the time for payment. The court held that there is a distinction between clauses which impose a time requirement for payment, as opposed to a limitation on the right to be paid at all. The condition precedent must be spelt out in clear and precise terms in order to shift the risk to the sub-contractor. The inclusion of such a clause can be justified on the ground that the parties to a contract apportioned the risk of non-payment by the employer between those who have earned the right to be paid.
It is found that the 'pay when paid' clause in the agreement does more than identifying the time at which certain things are required to be done. In other words, the court agrees with the decision of the Court of Appeal in Asiapools and not that in Antah Schindler. Finally, importance to the clear express intention of the parties is emphasised.
Comment
The decision in Antah Schindler seems to show the reluctance of the court to enforce clauses and requirements that were not expressly provided for in the contract as agreed by two parties. The case had recognised a well-established principle that if the main contractor relies on the argument that the 'pay-when-paid' clause is a condition precedent before liability to pay to the sub-contractor arise, the clause itself must contain no ambiguity.
Although Asiapools arrived at a different decision, it should be noted that the Courts stressed on the same principle in that the effect of a 'pay-when-paid' clause may differ, depending on the construction, clarity and ambiguity of the clause. Binajati supported Asiapools and found that not only does the clause relied upon is clear and unambiguous, but the court has the duty to give effect to the clear intention of the parties.
The courts are put into a position of performing a balancing act because if they interpret the 'pay-when-paid' clause in the way that Asiapools and Binajati did, it would serve as a protection for main contractors for situations when employers go insolvent. However, if the courts interpret the said clause in the way like Antah Schindler, it would clearly protect the sub-contractor who has performed its work diligently despite the non-payment of the employer, which is through no fault of the sub-contractor.
In light of the decisions of the above Court of Appeal decisions, parties to a contract who intend to impose the 'pay-when-paid' clause as more than a time limit for payment must insist on having an express provision indicating such intention.
Footnotes
1. Antah Schindler Sdn Bhd v Ssangyong Engineering & Construction Co Ltd [2008] 3 AMR 466
2. Smith and Smith Glass Ltd v Winstone Architectural Ltd [1992] 2 NZLR 473
3. Asiapools (M) Sdn. Bhd. v IJM Construction Sdn. Bhd. [2010] 2 CLJ 28
4. Bina Jati Sdn Bhd v Globe Engineering Sdn Bhd [2013] 3 AMR 1
Originally published in November 2013.
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