For sub-contractors of all types, pay-when-paid (PWP) clauses in sub-contracts can be particularly stressful. Often featured in mechanical, electrical and engineering (MEP) sub-contracts, PWP clauses, in essence, stipulate that an MEP sub-contractor (MSub) will receive payment within a given period of time – typically around 14 days – after such payment has been received by the main contractor. However, the main contractor may, as is often the case, take the PWP clause to mean that it may avoid making payments due and owed to the MSub, unless and until the corresponding payment has been received from the employer.

Most MSub-main contractor disputes emanate from disputes between the employer and the main contractor. In addition to delayed payment for works done by the MSub, what is often observed is exclusion from any negotiations between the employer and the main contractor, coupled with a lack of adequate transparency.

Antonios Dimitracopoulos

Nevertheless, it is possible – and often necessary in cases of prolonged delays in payment – for a sub-contractor to argue that a lack of pursuit of monies owed may be contrary to the MEP sub-contract and in breach of the principle of good faith. In such instances, a main contractor may attempt to argue that a PWP clause within a contract means that the MSub, as the party at the bottom of the pecking order, should simply await its fate.

The PWP clause usually stipulates that no payments should be made to the MSub until the main contractor had first received these from the employer.

After either termination or completion of its scope of work and handover of a project, the MSub would issue numerous reminders to the employer for payment of outstanding invoices, but if none of these result in payment, then the MSubs usually resort to commencing a legal action against the main contractor.

In some instances, the MEP sub-contract may contain a dispute-resolution clause, which allows the main contractor to force suspension of any legal proceedings brought against it by the MSub, pending resolution of any corresponding dispute that the man contractor has with the employer.

However, it has been successfully argued in arbitral proceedings that the PWP clause has a key purpose – to bridge the gap of lack of privity of contract between the MSub and the employer, in exchange for an undertaking for the main contractor to pursue the MSub’s claims against the employer, as if they were its own.

Andrew Raof

An arbitral tribunal that is tasked with resolving a dispute under a PWP clause may be asked to place emphasis on surrounding factors. These would include whether the project is complete and whether the main contractor has been proactive in taking steps to pursue and obtain from the main contractor the sums rightfully owed to the MSub.

In doing so, arbitral tribunals have in the past taken the view that a main contractor cannot perpetually evade payment obligations to the MSub, simply because it has not yet received corresponding sums from the employer. This is, partly, in order to ensure that the main contractor is forced to either pursue and obtain the MSub’s dues, or simply settle what is an otherwise unassailable claim and then pursue this payment against the employer.

In light of this absence of privity of contract, therefore, the MSub would seek to demonstrate that the main contractor must both:

1. Adopt the MSub’s claims for payment, and
2. Pursue those claims for payment against the employer, as though the main contractor were doing so for itself.

Tribunals have held in the past that any failure to do so would automatically prohibit the main contractor from relying on the PWP clause, which thereby renders the main contractor directly accountable to the MSub for the amounts being claimed.

Thus, it is important for contracting parties to also bear in mind the following when entering into a sub-contract containing PWP clauses:

1. That parties are aware of the inherent risk of delay for payment of sums due;
2. That there will be an expectation and a requirement to demonstrate genuine effort to pursue sums due; and
3. That instigating arbitral proceedings should be a last resort, brought about either as a consequence of, or subsequent to, all genuine efforts and attempts being exhausted.

Furthermore, where there are clauses allowing for the suspension of dispute resolution due to a PWP clause, this may lead to proceedings being suspended as necessary and as appropriate in the circumstances.

In doing so, arbitral tribunals may seek to impose directions on the parties, including actions that must be taken to prove that a claiming party’s claims are pursued by the defending party against other parties further up the contractual chain.

For example, if no legal proceedings have been commenced by the main contractor against the employer, seeking payment for the MSub’s claims, the main contractor may be ordered by a tribunal to demonstrate the exact steps it has taken to pursue payment from the employer and provide periodic updates and evidence of such. In doing so, the main contractor’s good faith would be scrutinised at all times. This is because an implied obligation exists on the part of the main contractor to pursue with every means the rights and entitlements of the MSub, as though the MSub enjoyed a direct contractual relationship with the employer.

It is also significant to note that the MSub must not base its claim against the main contractor simply on a mere lack of payment, as this is likely to fail upon the black and white reading of a PWP clause.

Rather, the MSub’s claim should be presented as a failure on the part of the main contractor to pursue – and not simply, not to pay – the MSub’s claims, coupled with a sustained pressure on the main contractor that it demonstrates such pursuit is purposefully made.

Antonios Dimitracopoulos is Partner and Head of Arbitration & Dispute Resolution, and Construction Practices, and Andrew Raof, Associate, at BSA Ahmad Bin Hezeem & Associates LLP. They may be contacted at antonios.dimitracopoulos@bsabh.com and andrew.raof@bsabh.com, respectively.