Pay When Paid Is Banned: And Has Been Since 1998

‍‌‌​​​​‌​​​​​​‌​​‌​‌​​​‌​​‌‌​‌‌​‌‍A pay-when-paid clause is anything that says you only get paid once they've been paid by the client (or someone up the chain). Section 113 of the Construction Act makes those clauses ineffective in construction contracts, except in one narrow case: if the client up the chain is genuinely insolvent.

This is general guidance only and is not legal advice. Always get proper advice before you rely on this in a live dispute.

1. WHAT SECTION 113 ACTUALLY SAYS

Section 113(1) HGCRA: Kills any clause that makes your payment conditional on them receiving payment from a third person, unless that third person is insolvent (as defined in the Act).

So, in a normal situation, "we haven't been paid yet" is not a legal excuse to withhold your money.

Key points from the Act and case law:

• Pay-when-paid clauses are ineffective unless the clause fits the insolvency exception exactly.
• Courts read these clauses strictly – they won't rescue a badly drafted pay-when-paid clause.
• If the clause is ineffective, the usual payment rules and the Scheme apply – due date, final date, notices – and they must still pay you.

2. WHAT THESE CLAUSES LOOK LIKE IN REAL CONTRACTS

You'll see pay-when-paid dressed up in lots of ways, for example:

• "Payment to the Subcontractor shall be made within 14 days of the Contractor receiving payment from the Employer."
• "All sums are payable only to the extent the Contractor has received corresponding sums from the Employer."
• Retention wording like "Retention will be released when the Employer has released retention to the Contractor."

For construction contracts caught by the Act, these "when we get paid" bits are, in general, unenforceable. The main contractor carries the risk of the employer not paying in most scenarios.

They can still use timing-type clauses (e.g. "30 days from due date") and pay-when-certified mechanisms, but they cannot park you indefinitely until someone else pays.

3. THE ONE BIG EXCEPTION: UPSTREAM INSOLVENCY

The only time a pay-when-paid-style clause can bite is when the third party up the chain is insolvent and the clause is drafted properly.

For the insolvency exception to work:

• The clause must clearly say that your payment is conditional on payment from a specific third party (e.g. the Employer) and that if that party is insolvent, the contractor doesn't have to pay you until (and only to the extent) they get paid.
• "Insolvency" has to match the types defined in the Act (administration, liquidation, etc.) – if it doesn't, the clause can fail.

Even then:

• Courts read the clause narrowly; they won't fix bad drafting for the contractor.
• Without a tight, compliant insolvency clause, the contractor usually still has to pay the subcontractor, even if the employer has gone bust and not paid them.

If you see a clause that only half-mentions insolvency or is vague, there's a decent chance it doesn't meet section 113 and can be ignored.

4. WHAT THIS MEANS FOR YOU IN PRACTICE

Real-world consequences for subbies and small contractors:

• If a main contractor says "we can't pay you because we haven't been paid", you can point to section 113 and say that clause is ineffective unless the employer is insolvent and the clause ticks all the statutory boxes.

Even where there is an insolvency-style clause, you should get a lawyer/QS to check:

• Does it match the Act's insolvency definitions?
• Has insolvency actually occurred? (Proper administration, liquidation, etc.)

In normal non-insolvency cases, your tools stay the same:

• Use the Construction Act payment regime (due date, payment notice, pay less notice, final date).
• Use smash-and-grab adjudication if they miss notices, regardless of whether they've been paid upstream.
• Use true value adjudication if it's a pure valuation dispute.

You can also challenge over-aggressive conditional payment terms under general contract and unfair terms law in some cases, especially where you're on their standard terms and they're trying to shift all the risk down, but that's specialist territory.

5. HOW TO HANDLE PAY-WHEN-PAID CLAUSES WHEN YOU SEE THEM

Practical playbook:

Before you sign:

• Hunt for phrases like "when the Contractor receives payment", "to the extent of sums received from the Employer", or anything tying your payment to a third-party's payment.
• Ask for that wording to be removed or changed to a fixed time from the due date (e.g. "30 days from due date"), not from their receipt of payment.

Mid-job, when they try it on: If they say they can't pay until they're paid, push back in writing:

• Refer to section 113 and say any pay-when-paid clause is ineffective unless the insolvency exception applies.
• Ask them to identify the "insolvent third party" and the clause they say they're relying on.

If the employer is genuinely insolvent: Get a lawyer to:

• Check if the insolvency event falls within the Act's definitions.
• Check the exact wording of the clause.
• Even in insolvency, they can't use pay-when-paid to dodge other statutory duties like issuing proper certificates or notices – only to manage the risk of non-payment itself.

This page is guidance only and does not constitute legal advice. Using it does not make us your legal adviser. Always get advice from a qualified construction lawyer or specialist before you rely on section 113 in a live dispute.

What to do next

• Before you sign any new subcontract, search for phrases like "when the Contractor receives payment" or "to the extent of sums received from the Employer" · those are pay-when-paid in disguise.
• If you spot one, ask for it to be changed to a fixed time from the due date (e.g. "30 days from due date").
• If a main contractor tells you mid-job they can't pay until they're paid, push back in writing citing section 113 of the Construction Act.
• Ask them to identify the "insolvent third party" and the exact clause they're relying on · in most cases they can't.
• If the employer genuinely is insolvent, get a construction lawyer to check whether the insolvency exception actually applies to your clause.

Sources

• Housing Grants, Construction and Regeneration Act 1996 · section 113 (prohibition on conditional payment provisions)
• Insolvency Act 1986 · defines insolvency events relevant to the section 113 exception
• Scheme for Construction Contracts (England and Wales) Regulations 1998 · applies when pay-when-paid clauses are struck out

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