The Pay-When-Paid Clause

"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...