Pay-If-Paid and Pay-When-Paid Clauses in the Agreement and their enforceability in India

Pay-If-Paid clause in an agreement means that the main Contractor will pay the Subcontractor for the completed work only if he is paid by the customer of the Contractor who is the ultimate beneficiary of the service. If he is never paid by the customer, (for any reason, due to insolvency, deficiency in service, breach of agreement, etc.), he is not liable to pay the Subcontractor at all.

Pay-When-Paid clauses, on the other hand, establish the timing by which the main Contractor will pay the Subcontractor only after receiving payment from the customer of the Contractor who is the ultimate beneficiary of the service.

Such clauses are usually found in the western world, however, recently, courts have come across agreements containing Pay-If-Paid and Pay-When-Paid Clauses in the agreement.

The Hon’ble High Court of Delhi in National Projects Construction Corporation Limited Vs. Harvinder Singh & Company, FAO(OS) 259 / 2017 has held that inability to receive payment under the main contract does not automatically give right to the main contractor to stop the making of payments obligated to be made under the sub-contract. It is an axiomatic principle of law that work duly done, as per contract, is required to be recompensed. The said view was affirmed by the Hon’ble Supreme Court of India in Petition(s) for Special Leave to Appeal (C) No(s). 24254 / 2018 titled National Projects Construction Corporation Limited Vs. Harvinder Singh & Company after the Hon’ble Supreme Court dismissed the Special Leave Petition filed by the Contractor, National Projects Construction Corporation Limited vide order dated 17.09.2018.

Furthermore, Section 23 of the Indian Contract Act,1872 states that the consideration or object of an agreement is lawful, unless the Court regards it as immoral or opposed to public policy. The Hon’ble Delhi High Court has held the said clause to be unjust and against public policy.

Section 70 of the Indian Contract Act, 1872 states that where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered, meaning thereby, if the services of the Subcontractor have been availed by the Contractor, he’s liable to make payment.