“Pay when Paid”

Shannon Rajan discusses a recent case on "pay when paid" clauses

 

 

One of the greatest concerns in the construction industry today (and presumably to the builders of Neolithic monoliths) is cash flow. One manifestation of this age-old and ever-present concern is for a main contractor to attempt to shift the risk of the employer’s non-payment to its sub-contractors.  Typically, this is done by introducing what are known as “pay when paid” clauses into the sub-contract.

 

The recent Court of Appeal case of Antah Schindler Sdn Bhd v Ssangyong Engineering & Construction Co Ltd [2008] 3 MLJ 204 provides some guidance as to the Malaysian position on “pay when paid” clauses.

 

 

BACKGROUND FACTS

The respondent in the Court of Appeal, Ssangyong Engineering (“Ssangyong”), was the main contractor appointed by the employer to install lifts in respect of a project. The appellant, Antah Schindler, was a sub-contractor to Ssangyong.

 

Antah Schindler carried out and completed the works and received some payments from Ssangyong, leaving an outstanding sum of approximately RM1.2 million based on 4 interim certificates. Antah Schindler sued Ssangyong for the outstanding sum, and applied for summary judgment.

 

 

Antah Schindler’s position was based on Clause 11(b) of the Sub-Contract with Ssangyong, which read as follows:

“within fourteen days of the receipt by the Contractor of any certificate or duplicate copy thereof from the Architect the Contractor shall notify and pay to the Sub-Contractor the total value certified therein in respect of the Sub Contract Works and in respect of any authorised variations thereof and in respect of any amounts ascertained under cl 8(c) hereof less: ..”

 

 

Ssangyong resisted the application, relying on Clause 27(a)(vii) of the Main Contract:

“That payment in respect of any work, materials or goods comprised in the sub-contract shall be made within 14 days after receipt by the Contractor of payment from the Employer against the architect’s certificate under clause 30 of these Conditions which states as due in amount calculated by including the total value of such work, materials or goods, and shall when due be subject to the retention by the Contractor of the sums mentioned in sub-paragraph (viii) of para (a) of this Condition.”

 

 

Ssangyong’s position was that this clause was incorporated into the Sub-Contract pursuant to various provisions of the Sub-Contract.

The Senior Assistant Registrar refused the application for summary judgment, holding that there were triable issues. Antah Schindler appealed against that decision to the Judge in Chambers, who found that there was no dispute in respect of the quantum and thus allowed the appeal and entered summary judgment against Ssangyong. However, the Judge went on to hold that Ssangyong would only have to pay Antah Schindler as and when payment was received from the employer. Antah Schindler appealed to the Court of Appeal against this part of the Judge’s decision.  There was no cross-appeal from Ssangyong.

 

 

THE COURT OF APPEAL’S DECISION

The Court of Appeal held that clause 27(a)(vii) of the Main Contract had been incorporated into the Sub-Contract and that Antah Schindler by following the provisions of the clause in seeking payment had acquiesced to it.

 

Having characterised the broad issue as being one of a "pay when paid" clause, the Court then considered the effect of the clause, referring to the New Zealand case of Smith & Smith Glass Ltd v Winstone Architectural Cladding Systems Ltd [1992] 2 NZLR 473, where Master Towle made the following observations:

 

“While I accept that in certain cases it may be possible for persons contracting with each other in relation to a major building contract to include in their agreement clear and unambiguous conditions which have to be fulfilled before a subcontractor has the right to be paid, any such agreement would have to make it clear beyond doubt that the arrangement was to be conditional and not merely governing the time for payment. I believe that the contra proferentum principle would apply to such clause and that he who seeks to rely upon such a clause to show that there was a condition precedent before liability to pay arose at all should show that the clause relied upon contain no ambiguity.”

 

The Court of Appeal held that upon its proper construction, clause 27(a)(vii) did not restrict a claim by the sub-contractor but merely imposed a time limit on the main contractor to pay its sub-contractor.

 

The Court of Appeal went on to allow the appeal, holding that on the facts of the case there was sufficient evidence that Ssangyong had in fact been paid.

 

 

CONCLUSION

The case is of interest as it marks the first reported decision of the appellate courts in Malaysia on a type of arrangement commonly found in construction sub-contracts. The apparent adoption of the observations of Master Towle is to be welcomed. It appears that the Malaysian Courts see no conceptual obstacle to the practice of “pay when paid” and are content to apply the ordinary rules of contractual interpretation to such clauses. It is understood that an application by Ssangyong for leave to appeal to the Federal Court has been refused.

 

 

SHANNON RAJAN ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 
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