“Pay when Paid” Clause in Construction Contract (Summary)*

The Development Bureau of the HKSAR released the public consultation report in April 2016 in regard to the proposed Security of Payment Legislation in Hong Kong. For this consultation, the Bureau submitted four questions about “pay when paid” provision in the proposed legislation. They are i) whether “pay when paid” clause should render ineffective by law; ii) whether “pay when paid” clause should render ineffective even for the reason of insolvency in the higher supply chain; iii) whether payment conditional on certification or performance of obligations under another contract should render ineffective; and iv) whether nominated sub-contractors shall be exempted.

Two recent cases in Australia and Malaysia touch upon some of these issues. The Australia High Court handed down a judgment that contingent or dependent payment on the operation of another contract is ineffective under the relevant South Australian SOP Act. The Malaysia Court of Appeal dismissed an appeal on the adjudicator’s decision that if the cause of non-payment was insolvency in the higher supply chain, it was sufficient to render a conditional payment provision ineffective under the Malaysian SOP Act.

One of the key purposes of SOP legislation is to safeguard cash flow in the construction industry. The prohibition of “pay when paid” provision in construction contracts appears to be widely construed and effectively operated in different jurisdictions. The law drafting and judicial interpretation of this provision in the HK SOP legislation may vary in some degree following the stakeholder’s demand and expectation.


* The full text was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website.

Jurisdictions: 

Chartered civil engineer, chartered project management surveyor and construction arbitrator.  He is currently Honorary Secretary of the YMG of the Chartered Institute of Arbitrators (East Asia Branch).  He is also regularly appointed as construction adjudicator and mediator in the East Asia region.