Recent case considers “Pay When Paid” issue

The “pay when paid” issue has troubled the construction industry for
many years. It refers to payment terms contained in a sub-contract,
which typically provide that the main contractor shall pay the sub-
contractor a certain period of time after the main contractor has received
payment from the employer. The controversy is whether the phrase
should be construed as creating a condition precedent to the main
contractor's liability to the sub-contractor. Sub-contractors will argue
that “pay when paid” is different from “pay if paid” and that only the latter
will create a condition precedent i.e. a “pay when paid” term only
specifies the timing (not liability) for payment, so that even if the main
contractor has not received payment from the employer after the lapse
of reasonable time, the sub-contractor is entitled to be paid after
completion of its sub-contract works.

Before Wo Hing Engineering Ltd v Pekko Engineers Ltd (1998) (we acted
for Wo Hing in that case), the Hong Kong courts had no opportunity to
decide on the true meaning of “pay when paid”, after a full trial. All cases
which had touched upon the issue were only in the context of
applications for summary judgment and the courts in those cases did not
give a final ruling on the issue. In the Wo Hing case, having considered
various authorities from the US, Australia and New Zealand, the judge
accepted that a typical “pay when paid” term does not create a condition
precedent for payment to the sub-contractor.

Arguments on the true meaning of “pay when paid” have continued after
the Wo Hing case. Some main contractors still try to distinguish Wo Hing
by arguing that the payment term in that case was nothing like that in
the standard nominated sub-contract commonly used in Hong Kong
(“the Green Form”). They also argue that Wo Hing is a case involving
domestic sub-contract payment terms and that it is not fair for the main
contractor to undertake the risk of non-payment by the employer when
the sub-contractor is nominated by the employer itself.

A recent Court of First Instance decision has touched on the “pay when
paid” issue. In Kim Hung Construction & Engineering Co Limited v
Standard Refrigeration & Engineering Co. Limited (HCCT 37/2012,

1
judgment handed down on 21 June 2013), the sub-contractor claimed
against the main contractor in an arbitration for delay in completion of a
project, where the main contractor had not been paid by the employer.
The arbitrator ruled that the main contractor was liable to pay the sub-
contractor despite the fact that the main contractor had not been paid
by the employer. The main contractor sought leave in the High Court to
appeal against the arbitrator's ruling, under the old Arbitration
Ordinance (Cap.341).

The deputy judge was asked to construe the payment terms in the Hong
Kong Construction Association's Standard Form of Domestic Sub-
Contract, 1994 Edition, which contains elaborate provisions governing
the time for payment, together with a number of provisions in the letter
of acceptance. Construing those provisions as a whole, the judge found
that the payment for the delay claim had not yet become due under the
sub-contract.

Whilst there is nothing unusual about the judge disagreeing with the
arbitrator's finding, the following is of interest:-

1. The deputy judge accepted that in order to grant leave to appeal,

there must be at least serious doubt as to the correctness of the
award (the Nema Guideline). Yet, the deputy judge only explained
how he construed the payment terms in the sub-contract and it is
not clear why there was at least serious doubt as to the correctness
of the award.
2. In the judgment, the deputy judge concluded that the agreed
payment arrangement between the parties was one on a “pay
when paid” basis. As explained earlier, we will usually describe
payment by the employer to the main contractor as a condition
precedent for payment to the sub-contractor as “pay if paid”. Using
“pay when paid” rather than “pay if paid” to describe the payment
terms in question may cause confusion. It may now leave room for
main contractors to argue that even if the payment term is “pay
when paid” (as opposed to “pay if paid”), the sub-contractor is still
not entitled to payment before the main contractor has received
the corresponding payment from the employer.