A Pay When Paid clause is a contractual provision often used in the construction industry and other subcontracting arrangements in the UK. This clause stipulates that a subcontractor or supplier will be paid only after the main contractor has received payment from the client or owner. Here’s a detailed definition tailored for a UK audience:

1. Definition:
   • Pay When Paid Clause: A Pay When Paid clause is a provision in a subcontract or supply contract that makes the timing of the payment to the subcontractor or supplier contingent upon the main contractor receiving payment from the client. Essentially, the subcontractor gets paid only after the main contractor has been paid.
2. Key Features:
   • Conditional Payment: Payment to the subcontractor is dependent on the main contractor’s receipt of funds from the client.
   • Timing and Responsibility: The clause addresses the timing of the payment but does not necessarily absolve the main contractor of the ultimate responsibility to pay the subcontractor.
3. Legal Considerations in the UK:
   • Unfair Terms: Under the Housing Grants, Construction and Regeneration Act 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009), such clauses can be challenged if deemed unfair or used to unduly delay payments.
   • Construction Act: The Construction Act requires that construction contracts provide an adequate mechanism for determining what payments become due and when, and these must not be conditional on the performance of obligations under another contract.
4. Practical Implications:
   • Cash Flow Management: Subcontractors need to manage their cash flow effectively, as delays in the main contractor receiving payment can lead to delayed payments down the subcontracting chain.
   • Risk Sharing: The clause effectively shifts some payment risk from the main contractor to the subcontractor, which can be a significant consideration for smaller businesses.
5. Enforceability:
   • Judicial Interpretation: UK courts tend to interpret Pay When Paid clauses strictly and may view them as an attempt to transfer payment risk unfairly. As a result, these clauses may be closely scrutinized to ensure they are not being used oppressively.
   • Negotiation and Clarity: Parties to a contract should negotiate these clauses carefully and ensure clarity in their wording to avoid disputes.
6. Alternatives:
   • Pay If Paid Clause: Different from Pay When Paid, a Pay If Paid clause makes payment to the subcontractor contingent on the main contractor receiving payment. However, this type of clause is generally less enforceable in the UK due to legal protections for subcontractors.
   • Milestone Payments: Establishing clear milestones or stages of work that trigger payments, independent of the main contractor’s receipt of funds from the client.
7. Best Practices:
   • Clear Contract Terms: Ensure all parties understand the implications of a Pay When Paid clause and that the terms are clearly outlined in the contract.
   • Regular Communication: Maintain open communication between the main contractor and subcontractor regarding payment status and potential delays.
   • Legal Advice: Seek legal advice when drafting or agreeing to such clauses to ensure compliance with UK law and fair treatment of all parties involved.

In summary, a Pay When Paid clause in the UK construction industry links the payment to subcontractors with the main contractor’s receipt of payment from the client. While it helps manage cash flow for main contractors, it introduces significant risks for subcontractors, making legal clarity and fair negotiation essential.