The Qatar Court of Cassation recently gave an important judgment on a dispute concerning the enforceability of a pay-when-paid clause. This has attracted attention because such contract provisions remain more common in the Gulf region than elsewhere. Their usefulness (at least to main contractors) is obvious, in eliminating cashflow gaps between the main contractor’s receipt of payment for works completed, and its obligation to pay subcontractors for that same work.

As is often the case, it’s a zero-sum proposition. This benefit to main contractors brings a high-risk situation for subcontractors, who might have to wait indefinitely to get their money, without any means of recourse.

Well, maybe not indefinitely, as we shall see. In the case before the Qatar Court, a subcontractor brought proceedings against a main contractor, to recover payment for works done. The main contractor’s defence was based on a pay-when-paid clause in the subcontract and the fact that payment had not been received in the main contract. Such a provision is lawful in Qatar, as in other Gulf jurisdictions. Article 697 of the Qatari Civil Code states that “the employer shall pay the dues of the contractor upon taking over the work unless otherwise required by agreement or by practice”.

Job done? Well, the lower courts thought so, in upholding the pay-when-paid clause and refusing the subcontractor’s claim. However, the subcontractor appealed and the Court of Cassation took a different view, stating that such a provision cannot operate to keep a subcontractor from its money indefinitely. That is the most important finding, because it does not follow the literal interpretation of a pay-when-paid clause. Taken literally, such a clause can create a pay-if-paid situation.

So, if a payment delay cannot be indefinite, how long can it be?

The court indicated that the temporary delay allowed by such a clause must be reasonable, and that reasonableness would be a question decided on the specific facts of each case.

I would not argue with that reasoning but it allows scope for a lot of questions. Is reasonableness just a question of the length of time? Would a two-year delay be reasonable in a five-year build phase but not in a five-month build? Is the reason for the main contract payment delay relevant? It might be entirely out of the main contractor’s control – such as an owner’s culpable failure to pay on a valid interim certificate, or a financing issue. Alternatively, it might be a genuine owner refusal to pay (including the exercise of a right of set off) because of (for instance) defects or a valuation dispute on parts of the works unconnected to the subcontractor. Should there be a generally-applicable longstop? The court noted judicial guidance in the UAE that a delay of more than five years would be unreasonable.

Maybe this ruling will also increase main contractors’ motivation to recover payment from the owner. Typically, a pay-when-paid clause does not include an obligation on the main contractor to take all available measures to enforce its own entitlements to payment. We can contrast that with a typical Equivalent Project Relief (EPR) provision which (in its most common usage) limits an EPC contractor’s award of time extension or costs claims, to that which the employer has achieved in the project concession agreement sitting above that EPC contract. In this situation, the employer is typically required to press its equivalent claims under the concession agreement, in order to have the benefit of EPR in the EPC contract.

A similar obligation could be applied to pay-when-paid. Subcontractors have always been able to argue that failure by the main contractor to press its own payment entitlement is not Good Faith performance. Now, they might also argue that this failure is relevant to the reasonableness assessment in the Qatari Court judgment.  

This ruling will certainly help subcontractors who have waited beyond what they consider to be a reasonable period to get paid. And surely there is no harm in main contractors understanding that, at some point, that time will come and payment must be made regardless of their own position in the main contract.

A final thought: pay-when-paid is really a symptom. It is mostly used, I suggest, because main contractors have insufficient certainty as to their own prospects of getting paid in full and on time under main contracts. So how can payment certainty be strengthened at main contract level? It can be addressed through statute; and this is the thinking behind the legislation in several jurisdictions. In the UK, a single piece of legislation outlawed pay-when-paid and, at the same time, required that construction contracts (at all tiers) include timed obligations on the paying party, in receipt of a payment application, to notify its valuation of that application and any intention to deduct money from the sum to be paid, together with fixed dates for making that payment. The idea is to force transparency about what will be paid, and when, by making the paying party state its intentions. And if they don’t, the sum payable is the sum applied for.

* Dubai-based Stuart Jordan is the Global Head of Construction for Baker Botts, a leading international law firm.  He has extensive experience in the Middle East, Russia and the UK.