Have you come across the ‘ paid when paid ’ clause as a subcontractor ? Here is what it means and how it affects you .
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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 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 .
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The ‘ paid-when-paid ’ clause can cause a legal headache .
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 : i . the subcontractor completes work on an interim basis ii . they make an application for certification iii . they have their works certified iv . they transmit a tax invoice detailing the amount certified and v . finally , once the employer makes payment to the contractor , the contractor will then process payment to the subcontractor .
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
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