Subcontractor Claims to Surge After Ruling on Pay when Paid Clauses

The Qatari Court of Cassation recently ruled on the use of “pay-when-paid” clauses in subcontract agreements, a decision likely to empower Subcontractors in claiming payments for delayed work from Main Contractors. In effect, the court clarified that Main Contractors cannot indefinitely delay payments to Subcontractors based on their own payment issues with Employers.

Understanding Pay-When-Paid Clauses

Construction projects often face uncertainties such as delays and supply shortages, leading to payment defaults at various stages of the supply chain. When Employers fail to pay, Main Contractors struggle to fulfill their contractual duties.

“Pay-when-paid” clauses shift a significant portion of this financial risk to Subcontractors by stipulating that a Subcontractor’s payment is contingent upon the Main Contractor receiving payment from the Employer. Essentially, Subcontractors must wait for Main Contractors to be paid before they receive their due. Such clauses are legal in Qatar as well as in other civil jurisdictions in the Middle East, as most allow parties to stipulate payment conditions in their agreements which is in stark contrast to the UK, Australia and Canada which have all outlawed pay-when-paid clauses.

The Court’s Deliberation and Findings

Pay-when-paid clauses are intended to provide Main Contractors with flexibility during payment disputes, but the court was tasked with determining the limits of these clauses regarding how long payments could be delayed.

The relevant provision in the Qatari Civil Code, Article 697, states “The employer shall pay the dues of the contractor upon taking over the work, unless otherwise required by agreement or by practice.”

It follows that Employers must pay Main Contractors upon work completion unless otherwise agreed. However, the code does not clearly specify how long a Main Contractor can rely on a pay-when-paid clause to postpone payments to Subcontractors.

In this particular case, a Subcontractor sought payment from a Main Contractor, which refused to make payment citing non-payment from the Employer and relying on the pay-when-paid clause. The court ruled in favour of the Subcontractor, noting that such clauses should only provide a temporary extension for payment following project completion. The ruling emphasized that this extension cannot be indefinite or excessively long, but should allow for a “reasonable delay”.

The court indicated that determining what constitutes a “reasonable delay” would depend on the specific facts of the case, suggesting that guidance from other jurisdictions, such as the UAE, implies that a delay of over five years would be deemed unreasonable.

Implications of Ruling in Uncertain Economic Times

This ruling arrives at an interesting time for Qatar’s construction sector which is experiencing a cash flow crisis as a result of a decline in overall project awards during 2022 and 2023. Despite this, there is cause for some optimism in Qatar with the construction market forecasted to grow by 9.13% in 2024 on the back of the Doha Metro expansion works, significant investment in the oil and gas sectors, Qatar’s Vision 2030 and the 2050 Transport Plan.

Conclusion

The Qatari Court of Cassation’s ruling is a significant development for Subcontractors, offering them a clearer pathway to claim overdue payments. As the construction landscape shifts and economic pressures mount, both Subcontractors and Main Contractors may need to consider how they adapt their strategies to navigate this developing legal and financial environment.