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Insight · Getting paid

Pay when paid,
and why it does not bind you.

Making your money conditional on somebody else being paid has been ineffective in UK construction since 1998. The clause is still written, and still quoted down the phone.

Published ·Updated ·6 min read·Written by

An electrician testing at a distribution board

Pay when paid clauses are ineffective in UK construction. Section 113 of the Housing Grants, Construction and Regeneration Act 1996 makes any term that conditions your payment on the payer first receiving payment from someone else unenforceable, with one exception: where that third party is insolvent. Being told the money has not come down the chain is not, on its own, a defence.

Is a pay when paid clause enforceable?

The provision is short and it does one thing. A term of a construction contract making payment conditional on the payer receiving payment from a third person is ineffective, unless that third person is insolvent. The same applies where payment by some further party up the chain is itself a condition of that third person being paid, so the clause cannot be rescued by adding another link.

Ineffective is a stronger word than it looks. The clause is not merely unenforceable in a general sense and it is not a matter for the court's discretion. It is struck out of the contract, and where removing it leaves a hole in the payment mechanism, the Scheme for Construction Contracts supplies the missing provisions instead. You are not left without a payment date. You are left with the statutory one.

It has been in force since the Act commenced in 1998, which means an entire generation of the industry has worked under it. That has not stopped the clause appearing in subcontracts, and it has certainly not stopped the sentence being said down the phone. Both are still common, and both still work on firms who do not know the answer.

The clause is not a grey area, and it has not been one since 1998. It is written down, it is still signed, and it is still quoted at people who have not read section 113.

When does pay when paid still bite?

The insolvency exception is real, and it is the reason this article does not tell you the words never matter. If the third party genuinely is insolvent, the clause bites and the payer can rely on it.

What matters is that section 113 defines insolvency for this purpose rather than leaving it to ordinary usage, and the definitions are formal events: for a company, matters such as an administration order or the appointment of an administrator, the appointment of a receiver or administrative receiver, a resolution for voluntary winding up without a declaration of solvency, or a winding-up order, with corresponding provisions for partnerships and for individuals.

Which means the honest test is not whether the party above you is struggling, has cash flow problems, is waiting on its own client, is in dispute with the employer, or has told you the job is haemorrhaging money. None of those is insolvency. A formal insolvency event either has happened or it has not, and it is a matter of public record. If somebody relies on this exception, ask which event, and check it at Companies House before you accept it.

The clauses that try to get there another way

Because the direct version is ineffective, the drafting moved. You will meet subcontract terms that avoid conditioning payment on receipt of money and instead hang it on something happening in the main contract: certification by the employer's agent, agreement of the main contract final account, or the issue of a certificate to which you are not a party.

These are more arguable than a plain pay when paid clause, and they turn on the exact drafting, so this is not a question to settle from an article. What is worth knowing is that section 110 requires a construction contract to provide an adequate mechanism for determining what payments become due and when, and it expressly prevents that mechanism from being made conditional on the performance of obligations under another contract, or on a decision by anyone as to whether obligations under another contract have been performed. That is aimed squarely at this style of drafting, and it is the provision to raise when a clause tries to make your money depend on events in a contract you never saw.

What to say when you are told it

Keep it short, and put it in writing rather than saying it. Three sentences do the work: that the sum was applied for on a stated date and no valid pay less notice was served, that section 113 makes any term conditioning payment on receipt of payment from a third party ineffective unless that third party is insolvent, and that you will act on a named date if the payment is not made.

That email changes the conversation more often than it should, for an unremarkable reason. Whoever is holding your money is usually not the person who decided to, and a written reference to the section is the thing they can forward upwards. It also creates the contemporaneous record you will want if it goes further, which the phone call does not.

If it does not move, the position is the same as any other unpaid application, and the escalation ladder applies: a default payment notice if none was served, suspension on seven days' notice, then adjudication.

Where this does not apply

Section 106 excludes construction contracts with a residential occupier, meaning a contract relating principally to operations on a dwelling that one of the parties occupies or intends to occupy as a residence. Contract directly with a homeowner and none of Part II applies, including this. A contract with a developer or a landlord is not caught by that exclusion.

Otherwise the reach is wide. The Act covers contracts that are not in writing, since section 107 was repealed with effect from 1 October 2011 in England and Wales, so a term agreed verbally is no more effective than one that was typed. Scotland and Northern Ireland have their own equivalent provisions on the same architecture.

Keeping the paper trail in software

The argument itself is a matter of law. What Unibuild changes is how quickly you can put the email above together, because the sentence that matters is the first one: what was applied for, on what date, and what came back. In Unibuild's applications for payment module, applications sit against the project with their dates and receipts, and retention withheld is captured against the receipt it came off. Outstanding value is aged into current, thirty, sixty, ninety and one hundred and twenty plus days by the manager responsible. On the subcontract side, orders you place carry their own payment terms as structured fields printed on the order, which is the cheapest way to make sure the clause is not in your own paperwork either. Unibuild is bespoke software, in daily production since 2016, so the order goes out with your own terms on your own letterhead.

Subcontractor management Applications for payment Financial and invoicing Cost control

Where to start, on Monday

Two jobs, ten minutes each. Read the payment clause in the subcontract you are currently applying under, and find out whether it conditions your money on anything happening above you. Then read the payment clause in the orders you issue to your own subcontractors, because firms that have been told this once tend to have quietly written it into their own terms, and a clause that is ineffective against you is equally ineffective for you.

The second one matters more than it sounds. A subcontractor who knows section 113 and finds it in your order learns something about how you trade, and in a market where the research consistently finds reliable subcontractors are the scarce resource, that is not a reputation worth acquiring for a clause that would not survive a challenge anyway.

Sources

Checked against the source rather than against commentary. Where a schedule, a rate or a threshold is definitive on a government site, read it there.

Asked most often

The follow-up questions.

If the money still does not arrive, the remedies are set out in when the contractor above you will not pay.

Is pay when paid legal in UK construction?
No. Section 113 of the Housing Grants, Construction and Regeneration Act 1996 makes a term conditioning payment on the payer receiving payment from a third person ineffective, unless that third person is insolvent. It has been in force since 1998. The clause still appears in subcontracts, but it does not bind you, and where it falls away the Scheme for Construction Contracts supplies the payment provisions instead.
My contractor says he has not been paid by the client. Do I have to wait?
Not unless the client is formally insolvent. The payer's own payment position is not a defence to your application, because section 113 removes exactly that link. If the sum was notified and no valid pay less notice was served before the deadline, the notified sum is payable on the final date for payment regardless of what has happened further up the chain.
What should I do if a contract I am offered contains a pay when paid clause?
Price the job on the basis that the clause is ineffective, because it almost certainly is, and raise it before signing rather than after. Ask for it to be struck out. If it stays, note in writing that you regard it as void under section 113 and proceed. What it is not is a reason to walk away from otherwise good work. Nor is it a reason to accept late payment quietly once the job is running.
What happens to the payment timetable if the pay when paid clause is void?
The clause falls away and the rest of the payment mechanism stands, provided what remains is adequate. Where removing it leaves no workable timetable, the Scheme for Construction Contracts supplies one. Either way you end up with a due date, a final date and the notice regime, rather than with no payment terms at all. Striking out the clause does not leave you worse off than having it.
What about pay when certified clauses?
More arguable than a plain pay when paid clause, and dependent on the drafting. The provision to raise is section 110, which requires an adequate mechanism for determining what payments become due and when, and prevents that mechanism being made conditional on the performance of obligations under another contract or on a decision by anyone as to whether such obligations have been performed. Take advice on the specific wording.
Is a pay when paid clause in a purchase order enforceable?
No more than in a formal subcontract. Section 113 applies to construction contracts, and a purchase order for construction operations is a construction contract regardless of its length or title. Standard terms printed on the back of an order carry no special protection. The form of the document has never been the test, and firms that assume a short order sits outside the Act are usually wrong about several things at once.
Does pay when paid apply to retention?
Section 113 catches it. A clause making your retention release conditional on the contractor receiving its own retention from above is a pay when paid provision like any other. Retention release is a payment under the contract. The wording is often buried in a retention clause, where people do not think to look for it.
What is the insolvency exception to section 113?
Where the third party whose payment the clause depends on is insolvent, the clause is effective. Section 113 defines insolvency by formal events rather than by general financial difficulty: for a company these include an administration order or the appointment of an administrator, the appointment of a receiver or administrative receiver, a resolution for voluntary winding up without a declaration of solvency, or a winding-up order. Cash flow problems are not insolvency.
Does the pay when paid ban apply within a group of companies?
Yes. Section 113 bites on the clause, not on the relationship between the parties, so companies under common ownership get no exemption from it. A subcontract between two members of the same group that makes payment conditional on receipt from a third party is as ineffective as any other. The one narrow exception remains insolvency of a third party higher up the chain, and group membership does not create it.
Does section 113 apply to work for a homeowner?
No. Section 106 excludes construction contracts with a residential occupier, meaning a contract relating principally to operations on a dwelling that one of the parties occupies or intends to occupy as a residence. Contracting with a developer or a landlord does not fall within that exclusion, so the test is who the contract is with rather than the type of property.
Next step

Know your position on every order.

The clause is unenforceable, which helps only if you know what each subbie is owed and when it fell due, in both directions.

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