BREXIT: pay-when-paid clauses in construction contracts

Cash flow is the life blood of the construction industry, goes the mantra. Construction projects often have long supply chains. When cash stops flowing down the chain, businesses can fail. There is all too much recent evidence of this.  

Someone in the chain (say, a main contractor) could seek to provide in a contract that it does not have to pay the party below (subcontractor) until it has been paid by the party above (employer). This is a 'pay-when-paid' clause. 

Section 3  of the Construction Contracts Act 2013 does away with 'pay when paid' clauses. It provides that a term in a construction contract is 'ineffective' to the extent that it provides that payment of an amount due, or the timing of such a payment, is conditional on the making of a payment by a person who is not a party to that contract. 

There is an insolvency exception, for when the 'other person' (in our example, the employer, a company) is subject to one of four types of event: 

(a)    Winding up proceedings under the Companies Act 
(b)    Examinership proceedings under the Companies Act 
(c)    A winding-up or similar order by a court 
(d)    Appointment of a receiver over any of its property or assets
(e)    A corresponding event under the law of any state to which the EU Insolvency Regulation applies.  

What if the employer is an English company? At present, commencement of winding-up or administration proceedings against an English company would be covered by item (e). Post-Brexit, it would not, because the Insolvency Regulation will not apply to the UK. Thus, a main contractor would not be entitled to invoke a pay-when-paid clause because winding-up or administration proceedings had been commenced in the UK involving an employer incorporated there.  A pay-when-paid clause could still be invoked after the UK employer had been wound-up by order of a UK court, or if a receiver was appointed over any of its assets.

For more information in relation to this topic, please contact Vincent Power, Partner, or any member of A&L Goodbody's EU, Competition & Procurement team.

Date published: 20 February 2019