What exactly is a ‘pay when paid’ provision?
A ‘pay when paid’ provision is one where the release of retention under a subcontract is dependent on the operation of a clause of the head contract.
Under s 12 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) , a ‘pay when paid’ provision is unlawful and so void.
The High Court decision in Maxcon Constructions Pty Ltd v Vadasz  HCA 5 has reinforced the Court’s application of s 12 of SOPA to ‘pay when paid’ provisions.
Maxcon Constructions Pty Ltd (Head Contractor) entered into a subcontract agreement with Mr Vadasz (Subcontractor). The release of the Subcontract security was dependent on practical completion under the terms of the head contract.
Upon practical completion of the Subcontractor’s works, the Subcontractor sought release of its security. The Head Contractor’s payment schedule indicated that it would not release the retention held under the Subcontract. The Head Contractor relied on the subcontract clause concerning the release of the security, which said release of the security was dependent on the Head Contractor achieving practical completion for the entirety of the building works. The Subcontractor disputed the Head Contractor’s entitlement to retain the security as the security clause was unlawful.
The adjudicator determined that the Head Contractor was not entitled to refuse to release the retention, as the retention clauses were void under SOPA. The Head Contractor’s purported right to deduct monies in its payment schedule / Adjudication Response was therefore unlawful.
The Head Contractor sought judicial review in the Supreme Court of South Australia (and subsequently to the High Court) to set aside the determination.
The High Court dismissed the Head Contractor’s appeal, finding that the adjudicator had not made an error in its determination.
The High Court found that the Subcontractor’s release of the retention was dependent on the completion of the whole project in accordance with the provisions of the head contract, which was unrelated to the Subcontractor’s performance.
Accordingly, the subcontract security clause was void under s 12 of SOPA and the Head Contractor could not refuse to release the retention.
Head contract provisions cannot make the release of a retention sum dependent on the operation of another contract. To avoid infringing the ‘pay when paid’ provision under SOPA, subcontract payment provisions should be carefully drafted.
If you notice a ‘pay when paid’ provision in your contract or want to avoid falling foul of the requirements of SOPA in future contracts, please call Neusha Ghahreman or Brett Vincent at Vincent Young on (02) 9261 5900 today.