This document summarizes key points from a lecture on construction law relating to payments: 1. There can be inconsistencies between the terms of a main contract and subcontract that cause legal issues. For example, if a main contract allows dismissing a subcontractor for delay but the subcontract does not, as in Chandler Brothers Ltd v Boswell. 2. While subcontractors have no direct privity with the employer, employers can require collateral warranties from subcontractors to establish recourse for defects. For example, in Shanklin Pier Lt v Detel Products regarding a defective paint system. 3. Employers nominate specialized subcontractors for control and time savings, but main contractors can

1. Lecture 3:
LAW RELATING
TO PAYMENT
Group Members: Chian Chee Yong
Hong Kok Hang
CONSTRUCTION LAW [QSB
4LE4C1TU4R]ER: SR. EDDIE LIM
DATE: 23TH SEPT 2014

2. Construction industry requires a wide
rage of skills and mater ials which
may not be available from a single
construction company.
Contract
or
Sub-
Contractors
Suppliers
THEREFORE,

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… and also increasingly sophisticated engineer ing installation
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and system
M&E installation
Fire Protection
System

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Main contractors are now confined
more to:
•Site Management
•Planning
•Organization
•Procur ing the necessary
subcontract
•Securing per formance bond
•Purchasing insurance & etSco. ,
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•40% to 50% of Main Con works are
placed with Specialist Sub-contractors
•20% to 30% are placed with Trade Sub-contractors

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LAW BETWEEN:
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1
2
3
4
The Main Contractor and Sub-contractor
The Employer and Sub-contractor
Employer and Nominated Sub-contractors
Payments to Sub-contractors

7. 1. The Main Contractor and Sub-contractor
ISSUE: Problems ar ise where the terms
which the main contractor are required to
observe under the main contract turn out
to be inconsistent with his obligations to
the subcontractor under the subcontract.
Case:
Chandler Brothers Ltd v Boswell
(1936)

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Summary
•An engineer was empowered under the terms of the main
contract to order the main contractor to remove a subcontractor .
•The main contract in that case provided that, if a sub-contractor
was guilty of delay, the employer could instruct the main
contractor to dismiss that sub-contractor .
•The sub-contract expressly covered many of the matters in the
main contract, but did not specifically give the main contractor a
power of dismissal for delay.
•At the end, the main contractor chose to remove the
subcontractor and committed a breach of the subcontract.
Court Decision:
It was held by the Court of Appeal that the main contractor was
guilty of a breach of the sub-contract. The sub-contractor’s
under taking to car ry out the work in accordance with the terms
of the main contract was not enough to incorporate the power of
dismissal for delay.
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Case:
Chandler Brothers Ltd v Boswell (1936)
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To avoid Inconsistencies:
A subcontract may be drafted to expressly
incorporate cer tain terms of the main contract.
Where the term which is purpor ted to have been
incorporated does not conflict with the other
express terms of the subcontract, the cour t is
usually disposed to rule in favour of its
incorporation.
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•The terms are stated in Preliminary Bill

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Case:
Geary, Walker & Co Ltd v W Lawrence & Son
SumLtmda r(y1906)
•The subcontract contains a provision stipulating that the
terms of payment for the works… shall be exactly the
same as those set for th in clause 30 of the [main]…
contract.” The amount of retention under the main
contract would exceed the sum payable to the sub-contractor
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under the sub-contract by the end of the
project.
Court Decision:
The Cour t of Appeal decided that the terms of the main
contactor in respect of the payment were applicable, and
also that retention should be withheld. However , the
payments would be in the same proportion as the
proportion of the sub-contract sum to the main contract
sum. There was, therefore by implication, a pro-rata of
the amount of retention by reference to the main contract
payment mechanism.

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ISSUE: A different situation may be
encountered where the structure of the main
contract is of a different contractual character
from that of the subcontract.
Eg: where a fixed pr ice subcontract (without
quantities) attempts to incorporate the entire
set of provisions relating to valuation and
var iations in a main contract which is
structured on a re-measurement basis.
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Case:
Kian Hong Holdings v Ohbayashi Gumi
(1984)

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Case:
Kian Hong Holdings v Ohbayashi Gumi
Su(m1m9a8r4y )
•The main contractors were employed by a statutory author ity to
under take reclamation works. The dispute between the par ties
concerned the cor rect method of measur ing, for payment purpose,
the quantity of granite aggregates used.
•It was agreed that the subcontract was a measure and value contract
where the granite aggregate will be measured before been discharged
into the sea. Whereas the main contract was a lump sum contract
under which the works were paid on the basis of design volume
measurement on design drawings dur ing tender .
•There was also an express provision in the subcontract which
provides for the incorporation of the terms of the main contract into
the subcontract and another clause which provides that in the event
of a conflict between the terms of the main contract and those of the
subcontract, then the subcontract should prevail.
Cour t Decision:
The Cour t of Appeal held that the subcontractor should be paid based
on their subcontract conditions, i.e. pay on a unit pr ice on the
quantity actually discharged into the sea.
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13. 2. The Employer and Sub-contractor
ISSUE:
•The subcontract between a main contractor and sub-contractor
cannot give rise to any privity of contract between the main
contractor and employer.
•When the employer or architect instructs the contractor to appoint a
sub-contractor on specific terms, the actual and final terms of the
sub-contract may be revised and amended during the final negotiation
between the Main contractor and nominated sub-contractor.
Case:
Davis & Co Shipfitters Ltd v William Old
(1969)

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Case:
Davis & Co Shipfitters Ltd v William Old
(1969)
Summary
•The project’s architect informed a sub-contractor that his tender
was accepted and the contract will be concluded with the main
contractor .
•Before concluding the sub-contract, the main contractor inser ted a
new condition to pay when paid clause.
•The sub-contractor star ted work.
•The question before the cour t was whether the new clause forms
par t of the sub-contract.
Cour t Decision:
The cour t held that the architect did not finalise the contract with
the sub-contractor . The terms and contract are those between the
main contractor and sub-contractor and which the sub-contractor is
presumed to have accepted by star ting work without protest. Thus
main contractor is entitled to rely on the 'pay when paid' clause.
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Tankertanker Design • Due to absence of pr ivity of contract between employer and
sub-contractor is that neither par ty has direct recourse in
contract against each other, eg. sub-contractor cannot sue
employer directly for non-payment.
• Therefore if the employer is concern over the delivery
capability of a par ticular sub-contractor, he may provide in
the main contract express terms which permit him to directly
monitor the sub-contract while preserving the main
contractor 's accountability for any sub-contractor 's default,
eg. defective workmanship and delays.
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Tankertanker Design IF employer wish to have direct
route of recourse against a sub-contractor
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HOW?
Employer may demand a
collateral warranty
from the subcontractor.

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Collateral Warranty ?
• The mechanism of this war ranty is to require the sub-contractor to
assure the employer of the quality of the sub-contract works and
their timely completion.
• This war ranty is given to the employer in consideration of the
employer instructing the main contractor to award the sub-contract
to the par ticular sub-contractor .
• In the event of default, the employer can proceed against the sub-contractor
for loss or damage caused by breach of this war ranty.
Case:
Shanklin Pier Lt v Detel Products (1951)

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Case:
Shanklin Pier Lt v Detel Products (1951)
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Summary
•A contractor was engaged to repair and paint a pier with bituminous
paint.
•The defendants were paint supplier and had war ranted to the
employer that their paint would provide a life of seven to ten years.
•Relying on this war ranty, the employer instructed the contractor to
use the defendant paint.
•The paint system failed.
Cour t Decision:
The cour t held that the employer were entitled to recover from the
defendant in respect of the war ranty refer red to, notwithstanding
that the contract of sale of the paint was between the contractor and
the defendant.

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HOWEVER….
• Collateral agreement can be a two-edged sword.
• Though it give protection to the employer , it also
provides the subcontractor with a contractual basis to
proceed against the employer if the employer fails to
ar range for the sub-contractor to be engaged on terms
prescr ibed in the war ranty.

20. 3. Employer and Nominated Sub-contractors
The rationale behind nomination are:
a)Employer retains r ights to select sub-contractors for specialist
inputs or capabilities.
b)Employer exercise a degree of control of construction works
considered to be par ticular ly impor tant, eg. granite supplied by a
supplier with whom the architect/employer has successfully
worked with in the past.
c)Nomination can be used to reduce lead time elements in the
overall construction per iod, eg. structural steel frames.
d)Allows Architect/consultants more time for design details to be
developed for specialist works while the main contractor 's tender
can be called.

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•TankeSrtiannkecr eDe signthere is no pr ivity of contract between the
employer and sub-contractor , the employer cannot
proceed directly against a sub-contractor in the event of
a default by the sub-contractor . The employer can sue
the main contractor , who may then be entitled to be
indemnified and proceed against the sub-contractor . This
creates a 'chain of liability’
• To avoid any difficulty, an employer may require the
nominated sub-contractor to execute a collateral
war ranty in consideration of their being nominated for
the sub-contract works.
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IF Main Contractor wants to OBJECT to the
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Nomination
HOW???
12/02/14
PAM 2006 clause 27.3 which 'state that the contractor shall
not be required to enter into a sub-contract with any
Nominated Sub-Contractor against whom the contractor has
made a reasonable objection based on available known facts
and documented evidence that the financial standing,
solvency or technical competence of the nominated sub-contractor
is ......'
Case:
Bicker ton (TA) & Sons Ltd v Nor th West
Metropolian Regional Hospital Board (1969)

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Case:
Bicker ton (TA) & Sons Ltd v Nor th West Metropolian
Regional Hospital Board (1969)
Summary
•The nomination procedure is dealt with by vir tue of the main
contract and also a separate nominated sub-contract which is
relatively complex and of course reliant upon the drafting of the
provisions.
Cour t Decision:
Judge said that the contractor could object to the nomination based
on technical competency and financial standing of the prospective
sub-contractor but not on the sub-contractor 's pr ice and
specifications.
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12/02/14

24. 4. Payments to Sub-contractors
In General Pr inciple,
•Subcontractors are paid for their work by the main
contractor and their r ights to payment is independent
of any conditions or dealings between the main
contractor and the employer .
•In the absence of any express provisions to the
contrary in the subcontract, therefore, the
subcontractor is entitled to payment for their work
done regardless as to whether the main contractor had
himself been paid by the employer .
•These pr inciples apply to both domestic
subcontractors and nominated subcontractors.

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OW TO PROTECT THEM?
• Provisions for direct payment to nominated
subcontractors are stipulated in most standard form of
contract.
– These provisions are for the protection of nominated
subcontractors’ r ight to payment are backed by provisions which
entitle the employer to pay an aggr ieved nominated
subcontractor directly and deduct the amount paid from sums
otherwise due to the main contractor .
• Under most contract, the employer cannot be compelled
to exercise this r ight. The exercise of this r ight to pay
the nominated subcontractor directly is clear ly
discretionary.

26. QUESTION NO. 1
Explain the differences between “Pay if Paid” and
“Pay When Paid” Clauses in Construction Contracts.

27. Answer NO. 1
"pay when paid" clause - (i.e., that the pr ime contractor
will pay the subcontractor within X days of receiving
payment from the owner )
Is simply a timing mechanism and generally will not
excuse the pr ime contractor from having a payment
obligation to the subcontractor , regardless of whether the
owner has paid the pr ime contractor .
"pay if paid" clause - (i.e. that the pr ime contractor only
incurs an obligation to pay the subcontractor if, and only
if, it is first paid by the owner )
May constitute a condition precedent that excuses the
pr ime contractor from having a payment obligation to the
subcontractor if the owner does not pay the pr ime
contractor .

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Under Construction Industry Payment & Adjudication Act
(CIPAA), clauses regarding conditional payment such as “pay
when paid” and “pay if paid” are prohibited. Why?
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QUESTION NO. 2
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Answer NO. 2
Such conditional payments are unfair to sub-contractors. The
sub-contractor may not be paid due to non payment from
employer caused by the main contractor . For example, If
main contractor causes the delay and employer set off
Liquidated damages against payment due, then main
contractor may not be paid for that month. Hence, Sub-contractor
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may not receive payment although such delay is
not his fault.

30. Thank You