Payment Delays in the

Construction Industry
By Uditha Tharanga
BSc (Hons) QS, LLM, MRICS, MAIQS, FCIArb.
https://chamberofconstructionlaw.com/
2
Progress Payment

Reasons for Payment Delays

Reasons in Detail Key areas of

discussion
Remedies for Payment Delays

Suspension/Termination

Finance Charges/Interest
 Purpose of progress payment
 The Contractor has sufficient cash flow to continue with his works
 Motive to maintain proper resources
 Reduce unjust results Contractor’s having to wait till end of the project negotiation
 In line with Fiscal policy
 There are legal precedence mandating Progress payments in Construction
“Instalments payments are in their nature provisional liabilities. As has been frequently
said, they are to provide the cash flow for the contractor or sub-contractor to enable
him to perform his duties under the contract”
Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18
Progress Payment
 Right to make a progress claim and receive progress payment will be
governed by the relevant terms of Contract
 Making a progress claim
 Assessment of Progress by Engineer/CA/PM
 Making a payment to the Contractor
 There is no general right unless there is a right in the Contract or Statue
 It is implied to the Contract
 The Schedule of Payments [Sub-Clause 14.4]
 Monthly Claims
 Milestone Payment Claims
 The Employer’s are not having sufficient fund to discharge Payment obligations
 Deliberate Refusal to pay
 Pay when paid/Pay if Paid clauses in Subcontract Agreements
 Delay Payment certificates by Engineer/CA/ER/PM
 Issues related to correctness of Payment certificates/in adequate supporting
information
 Contractual clauses that permit to withhold payment due to
Delays, Non submission of Programmes, Defects
Contractual Provisions for
Withholding Payments
 Contractual Requirement to
Provide Supporting Information
 Can Engineer/ CA / ER reject the Payment Claim due to Error?
 Erroneous Payment Claim vs fraudulent payment claim
 The Contractor is to act honestly when making payment claims
 Fraudulent payment claims has no contractual effect
 Evidence of the nature and values of works performed (WIR,
Photographs, Joint site walks)
 Some Contractor’s do not supply adequate information
Can we make the certificate condition
 Compelled to supply those in dispute resolution procedure
precedent to receiving adequate details
 The Engineer can not make assessment if adequate information is
from the Contractor ?
not given to him Solution?
 Dispute regarding adequacy of information provided
 How does FIDIC manage this?
Contractual Provisions

Detail is not so much as important as negating the whole

claim
 Distinction Between Pay-If-Paid and Pay-When-Paid Clauses:
 “Contractor’sreceipt of payment from the owner is a condition
precedent to contractor’s obligation to make payment to the
subcontractor; the subcontractor expressly assumes the risk of the
owner’s nonpayment and the subcontract price includes the risk”
 “The contractor shall pay the subcontractor within seven days of the
contractor’s receipt of payment from the owner”
Violates protected mechanic’s lien rights
“We conclude that pay if paid provisions like the one at issue here are contrary
to the public policy of this state and therefore unenforceable because they
Leverage
effect an impermissible Mechanic’s
indirect Lien process
waiver or forfeiture to
of the subcontractors'
constitutionally protectedmake sure paid
mechanic's on time
lien rights in the event of nonpayment by
the owner”

Supreme Court of California in the case of Wm. R. Clarke Corp. v. Safeco Insurance Company (1997) 15
Cal.4th 882 (Clarke v. Safeco) also in Cosmo Construction, Inc. v. Travelers Casualty
 The Main Contractor remains liable to the employer for the
subcontractor’s performance
 In many cases, the UAE courts emphasized that the main
contractor remains contractually liable
“conditional payment clause was subject to general principles of contract which require the
courts to have regard to ‘meaning and intention, not mere words’ and to the ‘common interest’ of
the parties Court went on to conclude that: There is no justification for subcontractors to be
concerned with recovering the balance of their dues if they have completed their work”
Thus, with clear wording it remains possible to create a conditional payment obligation
Dubai Cassation No. 281/95 dated 6 July 1996
that survives beyond handover. Conversely, reliance on imprecise drafting or contractual
shorthand is likely to be ineffective

“The sub-contractor will only

Dubai Cassation be entitled
No. 302/2004 to a2005
dated 2 May proportional payment during the performance
period from any payment received by the main contractor from its client, the same does not
apply when a sub-contractor has completed all his work and delivered the project to the main
contractor. A sub-contractor has no obligation to wait for payment until such time as the main-
contractor has been paid”

Dubai Court of Cassation In Dubai Case no 18/2000

• Pay-when-paid clauses are enforceable under the UAE law
• The subcontractor is not able to claim its dues from the
main contractor until the latter has been paid by the
employer
• If the subcontractor brings legal proceedings?
Remedies for Delay Payment/Non Payment

• Requesting Security Interest

• Employer’s Financial Arrangements

• Suspension of Works

• Termination of Performance

• Financial Charges

• Claiming for Interest

Remedies for Delay Payment/Non Payment

• Asking Employer’s Financial Arrangement

• This innovative provision is intended to give some protection to the Contractor
• The Sub-Clause 2.4 contains two requirements
• What will constitute “reasonable evidence” ?
• This Sub-Clause 2.4 will therefore be particularly significant in the context of
project financed or aid funded projects
• The Sub-Clause links with Sub-Clauses 16.1 [Contractor’s Entitlement to Suspend
Work] and 16.2 [Termination by Contractor]. The right to suspend (which
includes a right to slow the rate of work) only takes effect 21 days after the
Employer has failed
• State whether it is intended to suspend or reduce the
rate of progress
• Basis of intended suspended
• What the Contractor needs to see before resume the
works
• In circumstances where the Statement and supporting documents
contain errors
• The notice under Sub-Clause 16.1 is a clear condition precedent to
the Contractor’s right to suspend
• No right to suspend due to Employer’s breach as an excuse for
suspending or slowing progress unless he has given notice as
required
• Care of the Works Must Continue During Suspension
• The consequence is that suspension under Clause 16.1 does not give the Contractor the
right to abandon the Site
• Indeed a failure to care for the Works during a period of justified suspension might give the
Employer the right to terminate under Sub-Clause 15.2 (b)
“Critically, obligations must be mutual and due for performance before the failure by one party to perform
an obligation permits the other to withhold performance of the corresponding obligation. Further, a party
exercising a right of suspension must be ready and willing to perform the obligation that is being withheld”

Dubai Cassation No. 170/1998 dated 3 January 1998 and Dubai Cassation No. 102/2007 dated 19
June 2007.
“It is for the Court of Merits to determine whether the obligations are mutual
and whether suspension of performance is justified in the circumstances”

Dubai Cassation No. 296/2008 dated 22 February 2009

• The civil codes of Bahrain and Kuwait expressly qualify the right of suspension by
reference to any agreement to the contrary
• The right of suspension is subordinate to the agreement of the parties and can
be waived or excluded by agreement
• The same reservations were expressed in Dubai Cassation No. 130/2006 dated
10 September 2006
• As with the right to suspend performance, this is a discretionary power that is
exercised by the Court of Merits
Dubai Cassation No. 287/1995 dated 31 March 1996, Federal Supreme Court No. 287/18 dated 31 March 1996 and Dubai
Cassation No. 130/2006 dated 10 September 2006

UAE Civil Code, Article 272. Bahrain Civil Code, Article 140, Kuwait Civil Code, Article 209,
Oman Civil Code, Article 171 and the Qatar Civil Code, Article 183
• Financing charges are not defined
• Term “interest” adopted in the FIDIC Red Book 4th edition
• If there was no financing in fact, would there be no right to financing charges
and/or interest?

• Experts (England & Wales) suggests that if Sub-Clause 14.8 is deleted, The Late
Payment of Commercial Debts (Interest) Act 1998 may apply under English law
• Although it is accepted by Islamic jurists that riba is prohibited absolutely
• There is no consensus on precisely what constitutes riba. Excessive interest or
usury is widely accepted as an indicator
- Financing charges are the costs of money
- practice in the construction industry for contractors and
subcontractors to resort to a claim for financing charges
- Interest is permitted on the basis that this represents
Compensation for ‘presumed’ damage for delaying
payment
- Financing charges are more typically a component of a
damages claim
- The provision of evidence to satisfy the burden of proof
that financing charges have been incurred by virtue of
non payment
- Read the Contract carefully to identify your rights,
obligations and risks
- Seek Expert opinion prior to Suspension and Termination
- The identifying and proving time impact/losses and
Expenses due to delay payments are challenging
- The Presentation is not alternative to any
legal/Contractual advice
- The circumstance of the each case need to be
considered
- Do not forget to leverage and Negotiate
Uditha Tharanga
BSc (Hons), LLM, MRICS, MAIQS, FCIArb
Email : udtharangaw@gmail.com