Excerpts - Payment - Pay-when-Paid Clauses (Just pasted for reference and have no rights over this article for whatsoever nature)

Payment - Pay-when-Paid Clauses © Daniel Atkinson 18 November 2001

KEYWORDS: Payment - Pay-when-Paid Clauses, Smith and Smith Glass Ltd -v- Winstone Architectural Cladding Systems Ltd (1991), Thomas Dyer & Co -v- Bishop International Engineering Co [1968], Durabella Limited -v- J. Jarvis & Sons Limited (September 2001), pay-when-paid clauses, Housing Grants Construction and Regeneration Act 1996,

SUMMARY In  Durabella Limited -v- J. Jarvis & Sons Limited (September 2001)  it was held that the 1996 Act clearly envisaged that pay-when-paid clauses which shared the risk of insolvency were not unreasonable.   A contractor cannot rely on a pay-when-paid clause if the reason for non-payment is its own breach of contract or default.  A party cannot take an advantage from its own breach of contract. A pay-when-paid could only be effective so long as the main contract machinery of payment was capable of being operated.  For the clause to be effective the contractor impliedly undertakes that it will pursue all means available to obtain payment, or it will not be able to rely on the clause to defeat the subcontractors claim for payment. One interesting observation in Durabella was that Section 113(1) of the 1996 Act did not affect payment conditional on certificates under the main contract, the parties freedom to make such arrangements was stated to be legitimate and not unreasonable. Contractors and subcontractors in the construction industry know the real meaning of the famous phrase cashflow is the lifeblood of the industry. A contractor who pays a sub-contractor before being paid by the Employer, is effectively funding the project.   Add to this the cost of pursuing the Employer for non-payment and the precarious nature of construction becomes obvious.  Insolvency of the Employer in that situation can threaten the continued existence of the contractor. A pay-when-paid Clause means that a subcontractor may have completed the SubContract Works in accordance with the SubContract, but is not paid because of matters not connected with the SubContract. The Employer may for instance withhold payment because of default by the contractor or other subcontractors. Not surprisingly, contractors argue that pay-when-paid clauses are a valid and legitimate protection against these risks, which are more marked in the present lurch of the economy to recession. The subcontractor on the other hand has an equally valid argument against pay-when-paid clauses.  If he has properly carried out the work, he argues, he should be entitled to be paid, otherwise he will run the risk of continued existence instead of the contractor.  He should not become embroiled in disputes between the Employer and contractor, which may have nothing at all to do with his work.   That situation would be unreasonable says the subcontractor and the Housing Grants Construction and Regeneration Act 1996 is an indication that cashflow of subcontractors should be protected. Courts appear to dislike pay-when-paid clauses and have adopted an interpretation to reduce their impact.  In the New Zealand decision in Smith and Smith Glass Ltd -v- Winstone Architectural Cladding Systems Ltd (1991) a distinction was made between an 'if' clause and a 'when' clause.  An 'if' clause requires the contractor to pay the subcontractor only when he has received payment from the Employer. The 'when' clause indicates the time for payment only, so that the time for payment to the subcontractor is calculated from the date when payment should have been made by the Employer, whether or not payment has in fact been made.  It was held that unless the clause spells out in clear and precise terms that payment will not be made until payment is received, the clause does no more than indicate the time for payment. The US Courts have taken a much more robust approach in reducing the effect of pay-when-paid clauses. In Thomas Dyer & Co -v- Bishop International Engineering Co [1968] a pay-when-paid clause was held only to postpone payment for a reasonable time, to allow the contractor to obtain funds to pay, following the Employers failure to pay. The English courts have not followed either approach, but have taken the lead from the enactment of the Housing Grants Construction and Regeneration Act 1996. Section 113 of the 1996 Act makes unenforceable pay-when-paid clauses of the if type, in construction contracts to which the Act applies, except in the case where non-payment is due to insolvency of the Employer.  Section 113 deals also with the situation where the main contract includes a pay-when-paid clause which is dependant on another person making payment.  If that other person becomes insolvent, and the Employer does not make payment, then the contractor is not under an obligation to make a related payment, provided the SubContract pay-when-paid clause is in suitable terms. The recent decision in Durabella Limited -v- J. Jarvis & Sons Limited (September 2001) now establishes the position in English Law.  It was held that the 1996 Act clearly envisaged that pay-when-paid clauses which shared the risk of insolvency were not unreasonable. Such clauses would therefore be enforced. In my view, unless a contract falls under the 1996 Act, it will be difficult now to argue against enforcement of any pay-when-paid clauses on grounds of unreasonableness. The decision does not open the floodgates for pay-when-paid clauses. There are a number of sensible legal safeguards identified in the decision.  First, it was held that a contractor cannot rely on a pay-when-paid clause if the reason for non-payment is its own breach of contract or default.  A party cannot take an advantage from its own breach of contract.  Second, it was held that a pay-when-paid could only be effective so long as the main contract machinery of payment was capable of being operated.  It was an implied condition for the operation of such a clause.  If the machinery breaks down as for instance where certificates are not or cannot be issued as they should be, then the contractor was best placed to remedy the situation.  For the clause to be effective the contractor impliedly undertakes that it will pursue all means available to obtain payment, or it will not be able to rely on the clause to defeat the subcontractors claim for payment. The second safeguard was applied to the particular facts of the case in Durabella.  Termination of the contractors employment with the Employer prevented further payment.  The contractor had failed to pursue its remedies promptly and effectually.  It was held that the contractor could not rely on the pay-when-paid clause. One interesting observation in Durabella was that Section 113(1) of the 1996 Act did not affect payment conditional on certificates under the main contract, whether by Architect or Engineer under the contract.  This confirms the view generally taken by legal commentators.  The parties freedom to make such arrangements was stated to be legitimate and not unreasonable.   PRACTICE NOTE 1 The approach to be taken by a subcontractor faced with non-payment and a pay-when-paid clause can be stated in summary as follows: 1.  Establish by legal advice whether the clause is an if clause i.e. conditional on payment, or a when clause i.e. setting the time for payment only; 2.  If the clause is an if clause, then establish      (a) whether the non-payment is due to the contractors default if so he may not be able to enforce the clause; or      (b) whether the non-payment is due to the breakdown of the main contract administration if so the contractor may not be able to enforce the clause if he has not take steps to enforce his right to payment. 3.   If the clause is an if clause, then establish whether your contract is caught by the Housing Grants Construction and Regeneration Act 1996 if so if clauses are unenforceable except in situations of insolvency.

Tips - How to structure your thoughts around authorization matrix within organization

1. Business
1. Under Sales Head
2. Under Delivery Head

                                                              i.      Absence of PBG/BG/ any Security in Vendor or subcontracting agreement

                                                            ii.      OR in absence of back to back penalties or appropriate assurances / security/penalties to cover the exposures taken in the Client Agreement

                                                          iii.      Request for issuing Power of attorney/letter of authority for signing documents/contract

 

3. Under Both Delivery and Sales Head

                                                              i.      Performance guarantee or Bank Guarantee of any value

                                                            ii.      AMC amount Less than 18% of the market price/base price. (price without discount)

                                                          iii.      AMC at pre-determined price for more than two years

                                                          iv.      Strategic Partnership Agreement with Capex or Revex

                                                            v.      Bid for projects with revenue projections of  less than Rs. 20 crores or USD 5 million

                                                          vi.      Bid for projects involving EMD, BG of 10 Lakhs

                                                        vii.      To bid any RFP or enter into contract with any client, principal approval required

 

 

2. Office ADMIN
3. HR
4. Legal
1. LOL
2. Penalty / Liquidated Damages
3. Non-Solicitation only in resource deployment type of contract
4. Non-compete Clause or any other kind of business restrictive clause.
5. Confidentiality or Non-disclosure Commitment for more than 2 years
6. Jurisdiction– other than our local jurisdiction of 3i Infotech Offices
7. Governing Law - other than our local laws of place of business. We can limit it to English Laws, Indian Laws or Local Laws
8. Alternate Dispute Resolution. (ADR) or Arbitration – Local Contracts then Local Arbitration Law and Rules and International contracts then English Laws with UNCITRAL Rules; Place of Arbitration – Local Place of Business or Mumbai; Language of Arbitration – British English;
9. Termination for convenience or for any reason to the Client– Cost of Termination is mandatory for agreement involving Capex or REVEX or Resource deployment
10. Termination of Contracts Valuing over and above 1 Crore or involving CAPEX/REVEX over and above 1 Crore
11. IP Rights to client in Proprietary Software / Software Development, jointly or severally, by Parties / or of any third party IP Rights have to be back to back and such rights should not prejudice our interest to do the same or similar development; the client shall directly or indirectly not compete with 3i Infotech group companies; client should use it for internal and non-commercial purpose only.
12. Source Code through escrow arrangement as per our standard escrow agreement
13. Assignment right of  clients to their affiliates or any person
14. Client to borne the Taxes, Duties, Levies, etc
15. Tax Implications should be either as per the Corporate CFO guidelines or subject to approval of Corporate CFO
16. Insurance, other than the 2 insurance policies available with us i.e. CGL limit is INR 200,000,000 (Insurer: TATA AIG General Insurance Company Limited) and E&O limit is INR 512,050,000 (Insurer: ICICI Lombard General Insurance Company Limited)
17. Risk Purchase
18. Set-off of payment with any outstanding
19. Free upgrades or New releases, new versions commitments
20. Under an AMC Contract, agreeing for Upgrade of version or Customization or Implementation activity or data correction activity or any Business Process Study activity or any activity which requires extra man resource besides the normal maintenance activity without appropriate charges or non-T&M basis contracts.
21. Power of attorney for coordinating with regulatory body/government officials for business purpose.
22. Power of attorney for legal representation in court/regulatory matters for non-business maters.
23. Use of Open Source
24. Bid for projects with revenue projections of  more than Rs. 20 crores or USD 5 million
25. Bid for projects involving EMD, BG over and above 10 Lakhs

Format for Letter of Withdrawal of Purchase Order

Registered A.D.

 

 

Date____________

 

To,

<Company Name>

<Address, as per the PO>

 

 

Kind Attn: _________________(Name as per the PO with Designation)

 

Subject: Letter of <withdrawal of acceptance>/<non-acceptance> of the Purchase Order. 

 

Dear Sir/Madam,

 

 

We refer to your Purchase Order dated ____________, <and the acceptance given by us>, pursuant to which we had initiated the work as per the said Purchase Order.

 

We have made several attempts to get <our payment and >your support and co-operation in this matter so as to enable us to perform as per the said Purchase Order. Your unavailability and non-satisfactory support has forced us to withdraw our commitments agreed thereupon and we forthwith, by this letter, withdraw our obligations therein.

 

We, hereby, are discharged from all our obligations of whatsoever nature towards the compliance / performance of the said Purchase Order.

 

We are not liable for any claims /damages / penalty for any reason or of any nature in connection or arising out of the said Purchase Order or otherwise.

 

<We request you to release the payment for the part performed till date.>

 

Please acknowledge the copy of the same and return it back to us.

 

Thanking you,         

Yours faithfully,     

 

For XXXXXXXX Limited

 

 

____________________

Authorized Signatory 

Format for Termination for convenience

Registered A.D.

 

 

Date____________

 

To,

<Company Name>

<Address, as per the Agreement>

 

 

Kind Attn: _________________(Name as per the Agreement with Designation)

 

Subject: Notice of Termination for convenience of <Title of the agreement>Agreement dated ______________ (“said Agreement”) executed between _<client>______________ and “Service Provider”). 

 

Dear Sir/Madam,

 

 

We, hereby terminate for convenience the said Agreement as per the clause ## by giving 90 days notice period in accordance with the terms of the said Agreement.

 

We request you, in compliance to the clause no. ## captioned as “Effect of Termination”, to return us all the confidential information, in possession/under control, including the Source Code, Software Materials, Software Documentation, or any other confidential and proprietary information associated therewith or extracted there from and certify that all such confidential information is either returned &/or have been expunged by sending the certificate duly signed by the authorized signatory of this Agreement or any authorized personnel.

 

Upon expiry of the above notice period, the said Agreement shall stand automatically terminated and we, thereafter, shall have no obligations of whatsoever nature towards the compliance / performance of the said Agreement. We shall not be liable for any claims /damages / penalty for whatsoever reason or nature arising out of the said Agreement or otherwise prior to the termination.

 

We, further, request you to clear all the dues up till the notice period, on or before expiry of the notice period.

 

Thanking you,         

Yours faithfully,     

 

For XXXXXXXXX Limited

 

 

____________________

Authorized Signatory 

 

P.S. Copy of this Notice of Termination is marked to the __________Bank, to hand over the source code to Service Provider immediately on the expiry of the above said notice period.

 

 

Format Notice under section 138 of Negotiable Instruments Act, 1881

 

RPAD/UPC/Courier

 

<date>

 

To,

 

 

Sub:    Notice u/s 138 of Negotiable Instruments Act, 1881 in respect of cheque bearing No. ________dated <date> for an amount of Rs. <>>>> drawn on  <Bank>.

 

We, <nameofcompany>., having our registered office address at <REGDADRESS> with reference to the captioned subject hereby state and address you as under:

 

1.      <Transaction Information for which the cheque was issued like agreement or purchase or payment of roylaty fees with all the details of the transaction>

2.      That you had issued us a cheque bearing No. <<<<<<< >>>>>dated -------------for an amount of Rs. --------------drawn on Bank ---------------------in favour of us as a payment towards the aforesaid ______________.

3.      That we presented the abovementioned cheque for encashment in our account maintained at ---------------Bank Ltd, ---------. However, we are shocked that aforesaid cheque has been returned unpaid by your bankers with the remarks “FUNDS INSUFFICIENT” in the Bankers Return Memos received by us.

4.      We are constrained to state that the dishonour of the said cheque proves your intention to commit and perpetuate fraud on us and indulge in cheating and criminal misappropriation. Besides, you have committed an offence under the provision of the Negotiable Instruments Act, 1881.

 

 

 

Under the circumstances, we hereby serve upon you this notice under Section 138 of the Negotiable Instrument Act, 1881 as amended up to date, and call upon you to make the payment of Rs. -----------------/- (Rupees --------------------- Only) in lieu of the dishonour cheque within a period of 15 days from the receipt of this notice, failing which our Company shall be compelled to initiate proceedings under the Negotiable Instruments Act,1881, along with any other civil and criminal proceedings permissible under law and you shall be liable for all costs and consequences resulting there from..

 

Pls. note that said cheque along with the return memos of the Bank is presently lying with us for taking appropriate legal proceedings against you.

 

 

Yours faithfully

For -----------------Limited,                                       

 

 

 

-----------------------

 

Legal functions Architecture and Culture

 

The Architecture and Culture followed by various MNC is as below:-

1. Horizontal Based (Model A)
1. All at the same level (no hierarchy at all)
2. wherein hierarchy within the team is

                                                              i.      to enjoy the benefit that as an employee is entitled based upon his/her grade

                                                            ii.      for 2^nd level of review/vetting of high value or strategic level contracts / large financial contracts

3. Project based assignments are given to each POC and his Reviewing POC to supervise the project reviewing/vetting
4. All the documents to be vetted are done by such POC and reviewing POC.
5. For distribution of the work / assignment of work the Chief POC has to keep track and accordingly and assign it. ( This is not very strictly followed hence duplication of work with two POC happens, but that is taken care by having monthly reviewing of the whole team, as generally most of the contracts go beyond a month’s period)
6. The work of printing and franking everything is done by the POC and he maintains all the records / repository of the work done by this team.
7. This team takes care of all the issues pertaining to the project assigned.
8. This is mostly followed by non-Indian based MNCs
9. This is purely related to contracts
10. For non-contract work, the respective department like HR, Personnel, Admin, takes care of it with standards/guidelines available with them and only if there are certain contracts that has deviation from guidelines comes for vetting to legal.
1. Horizontal Based (Model B)
1. One Main POC for Business and he distributes the work to Legal POC he/she feels best suited for the contract type on basis of skill set, ability, turnaround time, type of work, etc (sole discretion) who has a junior team under him/her which does not interact with Business but only vets it and send to Legal POC who finally reviews and responds
2. The advantage here, the two reviewers and juniors ensure that as per the guidelines and checklist available everything is put in such contracts and the reviewer may or may not vary the changes and also articulate that best suits to the contract.
3. This allows to use juniors and while they in training the Legal POC protects all the interest of the organization.
4. The training and standardization aspect is very important here and so the Legal POC has to ensure that his / her juniors are periodically trained to reduce his / her burden of work.
5. This model is best suited for low budgeted medium size organization
6. There is a contract management team who takes care of the printing, franking, repository, retrieval, and getting it signed by the respective signatory and so on
7. Non-Contractual Work: as mentioned in j hereinabove
8. The major difference between model A and model b, is that in the later, horizontal layer is at the senior level as compared to model A, where everyone is Legal POC, which means more risk while vetting the contract but more resource to handle issues. In Model A, each one becomes accountable and responsible so the probability of learning is fast as compared to Model B, where impression of the Legal POC will explore the juniors ability to think and respond.
2. Horizontal Based (Model C)
1. Everyone acts as legal POC (juniors and seniors) but based on the region or geography, few of the legal POCs are identified as POC and irrespective of the hierarchy, you are accountable and responsible to respond in time, to whom the business team approaches for legal support
2. The Senior act as principal helping the juniors to understand and participate in negotiation or upon escalation step in to such assignments which are handled by such a junior.
3. The Senior is part of all the responses that junior makes and senior may or may not comment; Incase of any doubt the junior approaches the senior for guidance and it is presumed that he / she is guided by the senior.
4. From Printing to franking, all the activity are done by document management team (or paralegal team)
5. Non-contractual activity / IPR / Property / Joint Ventures / High level commercial contracts are done by the non-contracting legal team specialized in it.
6. The regular business contract vetting team is not involved in issues and activities like mentioned in (e) above
3. Vertical Based (Model D)
1. The Team has a hierarchy and reporting structure at each level certain types of work is mapped (above which review is not required unless guidance required) with such a team leader playing a role of reviewing it as the accountability is mapped to such team leader
2. For eg. Threshold limit of contract below a crore value or boiler type of contracts (i.e, very complex and with too many type of products and services under one contract), contracts involving IPR, source code, etc
3. General business contracts to which the standards are in place and minor reviewing or reinforcing the standards in such normal business contracts can be done, of which the business risk and standard guidelines are in place.
4. Here the seniors have to play a vital role to work on standards and guidelines of the risk related to any nature of work and business and then thereafter float it to their juniors so that they can independently respond.
5. The final review is been done by the person (in hierarchy) accountable i.e. Team Leader
6. All the kind of activity is mapped with respect to contract and any litigation/issues related to such type of contracts.
7. Each vertical team has document management team and last mile records are maintained by such team making the hierarchy responsible
4. My last Company(ABC) business wise model under the SA Geo (Model E)
1. Legal POC mapped to each nature of transaction so any customer, vendor, NDA, LOA/POA, Notices, Misc work, etc connected to that nature of transaction would go one legal POC
2. This helped in getting hold of the issue or vetting the contract, in a speedy way;
3. As the distribution was through the system, backend could be mapped to any person replacing or joining;
4. Quantum of work pertaining to any nature of work could also be evaluated and depending upon the assessment of the work done and work requested, the strength of the legal POC could be evaluated
5. Further, flexibility was there that within the business line (eg. Within OO, Cash Management activity or KPO or LPO or R&T, etc level of services could be mapped to various available resources, reducing the burden of work based upon the review done on monthly basis)
6. Further, having a ADMIN POC group entitled any legal POC to respond any transaction without actually getting mapped to the nature work based on assignment given or due to one person on leave
7. The ATS gave back-up of all the work done by previous POC, subject the legal POC following the process;
8. Printing, franking, Repository, depository could be mapped.

 

6. My Competitor Company’s (XYZ)Legal Vetting Process (Model F)
1. Dy. General Counsel one level below the Global Head, controls the transactional vetting
2. AGM level also work on both horizontal as well vertical level transactional support
3. Manager and Asst Manager, Senior Executive, Executive, Trainees, etc report to Dy. GC while mentoring is done by AGM level
4. The work distribution is similar to geography based (or in simple words, country based or legal entity based) legal support team but Corporate AGMs contributes and participates in all the contracts across the globe except the US & UK based entity contracts.
5. There is team of IPR based in fort office
6. There is team of document management who are responsible for printing franking, repository and depository.
7. This team retrieves contracts related to a project id and hence all the contracts mapped under that ID can be retrieved; they even maintain a customer wise documentation at global level except US & UK
8. There is no legal manual and some form of guidelines are there based as training material
9. The decisions are taken by legal and disagreements are settled by Dy. GC  except of US & UK; Generally Global GC does not interfere in the decision of Dy. GC hence he is the supremo of the organization excluding UK and US.
10. The UK & US based legal team reports to Global GC directly.
11. In case of international contract where there is conflict of work, decision of Global GC is final if escalated and in general any legal entity of XYZ entering into contract shall do the legal vetting of the contracts.
12. Generally corporate AGMs, looks after RFP/Tenders using the existing junior team as per his convenience
13. There are local legal team also in offices in metro cities or required based to handle non-contractual activities and at times such team also used for contract activity, solely based on Mr. Anchal’s decision.
14. There is no business wise distribution of legal team

 

7. My thought of Legal Architecture and Culture (Model G)

 

Keeping in mind the revolutionary structure announced by MD, wherein there are two markets (A) Emerging Markets and (B) Developed Markets

 

Being part of Emerging Markets, my views are as below

 

1. Geography Legal Heads to transform in Global Legal Heads (Handling the Business Units globally within the Emerging Markets) i.e. (a) Services - IT-SS (b) Services – OO (c) Products
2. Services – IT-SS to be handled by respective legal head with the pool team [Business Unit Legal Team - ITSS]
3. Services – OO to handled by respective legal head [Business Unit Legal Team - OO]
4. Products to be handled by respective legal head with the pool team [Business Unit Legal Team - Products]
5. As far as Non – Business Units like functions across the globe, IPR with ABC Group Company, Global Compliance and Legal Governance, Acting as a Bridge with the legal department of the Developed Market and as a Reviewing Head of the Emerging Market with corporate team to handle compliance. [Global Legal Team]
6. Each Head would be responsible for all the issues within the business unit.
7. The pool team would consist of junior team members or legal executives, trainees and if possible one person will be mapped to each head so that the work delegation is possible.
8. If the ATS is used then any of us can respond in absence of the other by taking over the transaction from the place where it left by the absent legal POC, as all the communications would be available to review and take it forward with date stamp;
9. Legal Notices, Warrant, Summons, arbitration, or litigation can be handled jointly with one member from Global Legal Team and Respective Business Unit Legal Team, to ensure that transaction do not take priority over such issues plus as without the help of respective Business Unit Legal Team(BULT), it would not be possible to handle independently by Global Legal Team(GLT); If the GLT feels that it is manageable for them to handle without BULT then BULT can passively participate to have update of the issue.
10. By teaming few people the work efficiency will soon increase as the nature of work is the same and backup is always available to immediately take over.
11. Rotation of team can be done, enrich the team with knowledge of the other areas of Business Unit by having a 3 months change or allowing them to take over any assignment of other BULT or GLT and work on it till the closure as the all the information will be available on the ATS;
12. We can rename the ATS with LSS (Legal Support Services);
13. GLT and BULT would have responsibility to make standard agreements that can be available on LSS, so that any new recruit or assignee does not have to search around for the standard documents and policies that are applicable to emerging market or developed market.
14. Looking from legal function prospective, our role will always be global so I would further suggest that BULT of OO to align with Developed Market Legal Team as there are many thing that can be shared between the two team as the outsourcing activity by nature is the same only certain protective laws in developed market restrict outsourcing and employment security laws are very strong in such developed markets. This will also help if the legal team of Developed Market is not available then GLT and BULT-OO can jointly participate in supporting them offshore with minimum difficult.
15. Similarly, if the joints can be built of ITSS and Products with Developed Market Legal Team then this same team can support globally with no much difficulty.
16. One paralegal person under the GLT can have control over all document management team looking after printing/franking/repository/depository in the ATS and bridging or integrating the Legal and CFO system  can be handled by the GLT team and they can also monitor the activities by reviewing it monthly basis.