For years, conditional payment clauses were one of the most effective ways for parties up the construction chain to delay paying those below them. A subcontractor could do everything right and still wait indefinitely, simply because the main contractor claimed they had not yet been paid by the employer. CIPAA changed that. Today, these clauses are void, and understanding why is important for anyone in the Malaysian construction industry.

What conditional payment clauses are

A conditional payment clause makes one party’s obligation to pay dependent on something else happening first. The two best-known versions are “pay-when-paid” and “pay-if-paid.”

A pay-when-paid clause says that a main contractor only has to pay the subcontractor once the main contractor has been paid by the employer. A pay-if-paid clause goes even further, treating payment by the employer as a precondition, so that if the employer never pays, the subcontractor never gets paid either. Both arrangements pushed the risk of non-payment down onto the parties least able to absorb it.

Why they were a problem

These clauses created deep unfairness in the supply chain. A subcontractor who had properly completed their work could find their payment held hostage to events they had no control over and often no knowledge of. If a dispute arose higher up the chain, those at the bottom bore the consequences.

This undermined cash flow throughout the industry and discouraged smaller players from taking on work. It also gave stronger parties an easy excuse to delay, knowing the weaker party had little practical recourse.

How CIPAA changed the position

CIPAA tackled this head-on by making conditional payment provisions void. Under the Act, a party’s right to be paid for work properly carried out no longer depends on whether someone else further up the chain has been paid first.

In other words, if you have done the work and the amount is due, you are entitled to claim it directly, regardless of what is happening between other parties. This was one of the most significant protections CIPAA introduced, and it has been a genuine lifeline for subcontractors and suppliers.

What this means in practice

If your contract still contains a pay-when-paid or pay-if-paid clause, you should know that such a clause cannot be relied on to withhold payment for construction work covered by CIPAA. The presence of the clause in the document does not make it enforceable.

This means a party who is owed money can pursue a payment claim and, if necessary, adjudication, without being defeated by the argument that the paying party has not yet received funds from elsewhere. It is a good example of how the law protects substance over wording.

Be aware of attempts to work around it

Some parties try to achieve the same effect through different drafting, for example by manipulating payment timelines or defining “due dates” in ways designed to delay payment. Whether a particular clause amounts to a void conditional payment provision can sometimes be a matter of interpretation, so if you are facing a clause that seems designed to stall your payment, it is worth taking advice rather than assuming it is valid or invalid on its face.