Index of Content

Pay When Paid Provisions

The Court of Appeal was given an opportunity in December to provide guidance on the much discussed issue of pay when paid provisions. In Chinney Construction Company Limited v Po Kwong Marble Factory Limited [2003] HKEC 1531 the main contractor had withheld monies due to the sub-contractor on an interim payment certificate issued by the architect under the main contract. Its justification for doing so was that the sums had not been paid by the employer. The main contractor relied upon clause 11 (b) of the sub-contract, which required the main contractor to pay the sub-contractor amounts certified by the architect in respect of the sub-contract works within 14 days of receipt of payment by the employer.

The matter had initially been considered in arbitration. The arbitrator had determined, seemingly from the statement on the face of the certificate, that sums certified in prior certificates had been paid. Accordingly, the arbitrator expressed himself to be satisfied that the requirements of clause 11 (b) had been met.

This conclusion is perhaps surprising, given that the arbitrator appears to have assumed that sums previously certified had been paid without an enquiry to this effect being made by architect. Nonetheless, both the Judge in the High Court, who was initially asked to consider the application for leave to appeal, and the Court of Appeal concluded that they could not interfere with this finding of fact (the Courts have only very limited power to interfere with findings of fact arrived at by arbitrators). This conclusion permitted both the High Court and the Court of Appeal to avoid dealing with the issue of interpretation of clause 11 (b) of the sub-contract.

A number of judgments, including for example Schindler Lifts (Hong Kong) Ltd v Shui On Construction Co Ltd [1985] HKLR 118, have touched upon the issue of interpretation of the "pay when paid" provisions contained in Hong Kong standard forms (such as clause 11 (b) in this case). However, there is no definitive judgment on the point. This recent case does not change that. However, in the short judgment of the Court of Appeal, the Vice-President of the Court of Appeal, Mr Justice Rogers, observed that he had" difficulty in associating [himself] with some of the reasoning in some of those decisions where it was held that it was arguable that the main contractor could withhold payment [from a sub-contractor] where there had been a set off [by the employer] which had arisen from matters wholly unconnected with the sub-contractor". These comments, although not relevant to the decision and so not binding on any lower court, throw further doubts on the line of authorities following Schindler v Shui On.

Consequently, main contractors who rely upon provisions of this sort should review them to ensure that their intent is crystal clear, failing which they must recognise that there is a growing risk that arbitrators and the Courts will not permit them to withhold payment in circumstances where the employer has applied a set-off.

Lovells, Asia Focus
July 2004

Back to top