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Pay When Paid © Daniel Atkinson 1999
Section 113(1) of the HGCR Act 1996 states that a provision which has the effect of making payment under a "construction contract" (as defined in the Act) conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent. Pay when paid clauses are therefore outlawed, unless the third party payer becomes insolvent. Accordingly if a main contractor includes a pay when paid clause in a subcontract he would only be able to operate it in the event of the insolvency of the employer. Insolvency is defined in the Act at Section 113(2) as covering the whole range of procedures, for companies - administration, administrative receiver, a receiver or manager, voluntary winding-up without a declaration of solvency, the making of a winding-up order. The Act also covers the insolvency of partnerships and individuals under Sections 113(3) and (4) respectively. The effect of the Act is to mitigate the effect of third party insolvency on the main contractor and make subcontractors share the risk and the loss in the event of the employers insolvency. The implication of these provisions may cause problems to some members of the construction team, for example where a developer is relying on finance from a third party but the developer has the obligation to pay the main contractor, or where a main contractor's payments are "milestones" but his subcontractors are to be paid monthly. Paragraph II.11 of the Scheme provides that where a contract payment provision is ineffective as mentioned in Section 113 of the Act, and the parties have not agreed other terms of payment then "(a) paragraphs 2, 4, 5, 7, 8, 9 and 10 shall apply in case of relevant construction contract, and (b) paragraphs 6, 7, 8, 9 and 10 shall apply in the case of any other construction contract."
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