Shaping Asia’s Infrastructure: “Pay when paid” clauses across Asia

Asia is entering a new era of infrastructure and energy transformation. The Asia-Pacific infrastructure market, valued at an estimated USD 1.61 trillion in 2025, is projected to reach USD 2.22 trillion by 2030 – a robust 6.64% compound annual growth rate. This growth is underpinned by policy and regulatory reforms aimed at improving project delivery, sustainability, and dispute resolution.  

This blog is the sixth in our series: “Shaping Asia’s Infrastructure”, which explores legal developments shaping infrastructure across Asia. In this post, we focus on the law and policy surrounding “pay when paid” clauses in construction contracts, which allow contractors to transfer delayed payment risk to subcontractors. We break down how these clauses might be treated in Singapore, Hong Kong, Malaysia, the Philippines, Indonesia and Japan, and why caution is required when relying on them.   

Introduction

Cash flow and risk management are critical priorities for contractors and subcontractors on large construction projects. Where possible, “pay when paid” clauses are used as a common tool by contractors to allocate payment risk down the contractual chain. In their strictest form, “pay if paid” clauses make the contractor’s obligation contingent on receiving payment from the employer; whereas, and more commonly, “pay when paid” clauses delay payment without removing the obligation to pay entirely. Either form of clause can provide a mechanism for contractors to avoid paying subcontractors while out of pocket. However, for the subcontractor, it represents a deferral of payment and potentially significant financial exposure. 

Many jurisdictions have introduced legislation, regulation or have case law that restricts the use of these clauses. For contractors and subcontractors, understanding how these clauses are treated in different jurisdictions is essential in avoiding unintended liability or unforeseen cash flow issues, and ensuring enforceable contracts.   

English Law Position

Under English law, Section 113 of the Housing Grants, Construction and Regeneration Act 1996 provides that a provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third party is insolvent. While few cases relating to “pay when paid” clauses have come before the Courts, the Court of Appeal in William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283 emphasised the need for main contractors to carefully define the circumstances in which a third party employer will be “insolvent” to ensure they can rely on “pay when paid” clauses in these circumstances.

Asian Jurisdictions

The diverse array of legal systems in Asia can be tricky to navigate for contractors operating in multiple jurisdictions in the region. Some jurisdictions, like Hong Kong and Singapore, are based on the English common law, whereas others are civil law systems.

As one might expect, there is an equally broad array of positions on the permissibility of “pay when paid” clauses. In many jurisdictions (Singapore, Hong Kong, Malaysia) such clauses are likely to be unenforceable:

• Singapore: Under Section 9 of Singapore’s Building and Construction Industry Security of Payment Act 2004, a “pay when paid” provision is “unenforceable and has no effect”.
• Hong Kong: Under Section 17 of Hong Kong’s Construction Industry Security of Payment Ordinance, which came into effect on 28 August 2025, “a conditional payment provision in a construction contract is unenforceable between the parties to the contract and has no effect in relation to any payment for — (a) construction work carried out under the contract; and (b) related goods and services supplied under the contract”.
• Malaysia: Under Section 35 of Malaysia’s Construction Industry Payment and Adjudication Act 2012, any conditional payment provision under a construction contract is void. A conditional payment provision is where the payer’s obligation to make payment is conditional on either that party having received payment from a third party or the availability of funds or drawdown of financing facilities of that party.

In the Philippines, Indonesia and Japan, however, courts may uphold such clauses:

• Philippines: “Pay when paid” clauses are generally allowed. Article 1182 of the Civil Code provides that if a conditional obligation “depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code”. This means that there is no categorical bar on conditional obligations, but such obligations are subject to any specific limitations in the Code. One such limitation is Article 1306 which provides that, in certain circumstances, specific clauses might be subject to challenge on the basis they are “contrary to law, morals, good customs, public order or public policy”.
• Indonesia: There is no express prohibition on such clauses under local law, and the starting position is that “pay when paid” provisions are permissible. However, it may be possible to develop creative arguments against such provisions under general provisions of the code (such as an obligation of good faith).
• Japan: These clauses are permitted. Article 24-3(1) of Japan’s Construction Business Act (Act No. 100 of 1949) provides that a main contractor must make payment within one month and within as short a period as possible after receiving payment. If the main contractor holds a special construction business license under the Act, receives a direct order from the orderer, and enters into a subcontract above JPY 50 million (or above JPY 80 million for building construction work), payment to the subcontractor must be made within 50 days, regardless of whether payment from the orderer has been received. This additional rule does not apply where the subcontractor also holds such license or its capital exceeds JPY 40 million.

Implications

Contractors and subcontractors working on projects in Asia should carefully consider the legal position on “pay when paid” clauses in each jurisdiction in which they operate, and under the law governing their contracts. Failure to abide by local rules may affect enforceability. 

Subcontractors should also be aware of their rights. If subcontractors fail to receive timely payment on account of “pay when paid” clauses, they may explore challenges to these provisions. Even in jurisdictions where there is no express prohibition on “pay when paid” clauses, contractors and subcontractors should nevertheless take careful local law advice on whether general legal principles may limit the application of a “pay when paid” clause in a specific situation.

Depending on the governing law of the contract and negotiation leverage, there may be other contractual and non-contractual strategies subcontractors can use to ensure adequate cash flow. For example, the contract’s pricing structure can be used to give a degree of cash flow certainty in lieu of pay-when-paid. Smaller discrete phases can be the subject of lump sum payments. There can also be direct payment arrangements between the employer and the subcontractor, shifting the risk away from the contractor. 

For example, a subcontractor could opt for lump-sum payments for simpler pieces of work to provide greater certainty in its cash flows. Contractors may be more amenable to this replacing a “pay when paid” clause where the value of the work is low relative to the overall project. Depending on the project and relative bargaining powers, it may be possible for subcontractors to negotiate lump sums for particular phases. There are also joint check agreements where both the contractor and subcontractor need to endorse a check for it to be cashed. This gives the subcontractor a degree of control over cashflow. 

Freshfields does not advise on the laws of Singapore, Malaysia, Indonesia and Philippines, and this article should not be construed as legal advice.