Introduction
This article briefly describes the practical operation of pay-when-paid and pay-if-paid type payment clauses, which are frequently encountered in construction projects and, accordingly, in construction contracts. In this piece, I will not go into the details of the doctrinal debates and will rather adopt a practical perspective.
Such clauses provide that payment to the subcontractor is contingent on the main contractor having received payment from the employer, and they often arise when there is a back-to-back contractual structure. The article will first examine how these arrangements arise in contractual practice and explain the distinction between pay-when-paid and pay-if-paid clauses. It will then address, in light of the principle of freedom of contract under Turkish law, the validity of such clauses and the limited circumstances in which their application may be limited. Finally, it will discuss, through two hypothetical scenarios, how these clauses may come into play in disputes, and will summarise certain points that may usefully be borne in mind when drafting such provisions.
Overview of the contingent payment clauses
Construction projects are typically based on a structure with multiple contracts and different players are involved in the process. In addition to a contract concluded between the employer and the main contractor, there are other contracts entered into between the main contractor and various subcontractors. Although these contracts are not directly dependent on one another from a legal perspective, they are interconnected due to the financial and administrative structure of the project. In practice, the amounts received by the main contractor from the employer often constitute the source of payments to subcontractors. In other words, the work performed by the subcontractor is, in practice, indirectly financed by the employer.
For main contractor, one of the key risks is the obligation to pay the subcontractor the sums that could not be recovered from the employer. In practice, it is commonly observed that pay-when-paid or pay-if-paid clauses are incorporated into contracts in order to allocate this risk, at least to some extent, within the contractual chain. Such clauses typically aim to manage payment flows and to pass on, or at least share, the risk of non-payment by the employer with the subcontractor.
These types of clauses may take different forms. In some cases, the contract expressly provides that “no payment will be made to the subcontractor unless payment has been received from the employer”. In other cases, the same outcome is achieved indirectly. For example, the subcontractor’s entitlement may depend on a payment certification mechanism under the main contract, or structured through sequential processes in which each stage depends on the completion of the preceding one. In this way, payment mechanisms are established such that both timing and scope are shaped by reference to the contractual relationship between the employer and the main contractor.
Independently two principal models can be identified. The first is the pay-when-paid model. Under this model, the subcontractor’s entitlement has arisen; however, the deferral of that entitlement is made contingent upon the main contractor receiving payment from the employer. The second is the pay-if-paid model. In this model, the very existence of the subcontractor’s entitlement is directly contingent upon payment being made by the employer. In order to illustrate this distinction more concretely, I set out below two brief examples of each:
Example 1: Pay-When-Paid (Deferral-Based Arrangement)
Payments to the Subcontractor shall be made after the Contractor has received payment from the Employer in respect of the relevant item of work. The Contractor shall pay the corresponding amount to the Subcontractor within [7/14] days following such receipt, and only to the extent of the amount collected from the Employer.
In such an arrangement, the debt exists; however, the timing of payment is linked to receipt of payment from the employer.[1]
Example 2: Pay-If-Paid (Condition-Based Arrangement)
The Subcontractor’s entitlement to interim payments under this contract is conditional upon the Contractor having received payment from the Employer for the same work items. If the Contractor does not receive such payment from the Employer, no payment obligation shall arise vis-à-vis the Subcontractor in respect of that item.
In this type of arrangement, payment is subject to a condition; in other words, the existence of the debt depends on the employer’s payment.
These examples demonstrate that the distinction between pay-when-paid and pay-if-paid appears to be significant. However, in practice the difference between the two may become less strict. As long as the employer does not make payment, the subcontractor’s receivable will not be realised in fact. For this reason, even though pay-when-paid clauses are, in principle, characterised as arrangements relating to deferral, they may, in light of their wording, produce effects similar to pay-if-paid clauses in situations where the Employer fails to pay.[2]
The Legal Characterisation of These Clauses under Turkish Law
Turkish law does not contain any specific statutory provision governing these types of clauses. Therefore, the starting point in assessing these clauses is the principle of freedom of contract. Under Article 26 of the Turkish Code of Obligations (“TCO”), the parties are free to determine the content of their agreement within the limits set by law. On that basis, linking a payment obligation to a particular event, or to payment under another contractual relationship, is not, in itself, prohibited.[3] Indeed, such clauses are frequently encountered in practice.
It is also worth to consider whether such provisions should be characterised, under general principles, as conditional obligations or as limitation-of-liability clauses.[4] Depending on how the relevant provision is drafted, both characterisations may be arguable. This classification will not, as a rule, affect the validity of the clause. However, as will be discussed below, it may become relevant when assessing the circumstances under which the application of such clauses may be limited.
Despite the principle that the parties can validly include such clauses in their contracts, in certain cases, their application may be restricted under general provisions. In this regard, the following section will examine the potential relevance of standard control terms (Articles 20–25 TCO), the principle of good faith (Article 2 of the Turkish Civil Code), and, as a specific manifestation thereof, the rule that a party may not prevent the fulfilment of a condition in bad faith (Article 175 TCO). In addition, the limits applicable to limitation-of-liability agreements, particularly in cases involving gross fault (Article 115 TCO), may also become relevant in restricting the application of such clauses.
When the Application of Such Clauses May Be Limited?
As noted above, while the validity of such clauses is, as a rule, recognised within the framework of freedom of contract, their validity or application may nevertheless be restricted under general principles of law. In this context, issues such as the control of standard terms, the principle of good faith, the prevention of the fulfilment of a condition in bad faith, and the limits applicable to limitation-of-liability agreements may come into play.
Pay-when-paid or pay-if-paid clauses may, in certain circumstances, also be examined within the framework of standard terms control.[5] Under the Turkish Code of Obligations, standard terms are defined as provisions that are prepared in advance by one party and incorporated into the contract without being negotiated with the other party (Articles 20 et seq. TCO). In such cases, it may be assessed whether the relevant clause was unexpected in light of the nature of the contract or whether it disrupts the contractual balance between the parties in a manner contrary to the principle of good faith.
That said, it should also be borne in mind that construction contracts are typically concluded between commercial parties (tacir), and that such risk allocation mechanisms are commonly used in commercial practice. Accordingly, it would be exceptional for these clauses to be invalidated on the basis of standard terms control. A finding of invalidity on this ground would generally arise only in exceptional situations, such as where the clause was not genuinely negotiated and imposes an unusual or disproportionate risk on the subcontractor.[6]
Another doctrine that may limit the application of such clauses is the prohibition of abuse of rights. Pursuant to Article 2 of the Turkish Civil Code, the manifest abuse of a right is not protected by law. This principle is also capable of finding practical application in the context of pay-when-paid and pay-if-paid clauses. Indeed, where a dispute arises in connection with such provisions, it would not be surprising for arguments based on a breach of the principle of good faith to come into play.
For instance, it is possible that the main contractor cannot receive payment because of its own failure to perform its contractual obligations, to properly administer the certification process, or to pursue payment claims with due diligence. In such a case, it may be inconsistent with the principle of good faith for the main contractor to rely on its own failure to obtain payment as a basis for withholding payment from the subcontractor. But it is important to bear in mind that not every failure to receive payment would amount to restrictive application of the contingent payment clauses.
Similarly, reliance on pay-when-paid clauses may be problematic where such provisions are deliberately misused by the main contractor. In particular, where the main contractor fails to exercise its contractual rights against the employer, refrains from advancing payment claims, or does not make use of available mechanisms such as suspension or termination, the subcontractor’s receivables may be left in a state of indefinite suspension. Such a result may be incompatible with the principle of good faith. That said, not every delay or partial non-payment should be regarded as a reason to restrict the payment clause based on the good faith principle.
These issues are not merely theoretical. These discussions come into question frequently in practice. Pay-when-paid clauses are generally intended to reflect delays in upstream payments in a reasonable manner within the subcontract. However, where the main contractor fails to pursue payment with due care or effectively suspends the recovery process, reliance on such clauses may amount to an abuse of rights. Accordingly, the application of pay-when-paid or pay-if-paid clauses requires an assessment not only of the contractual wording, but also of the conduct of the main contractor in pursuing payment from the employer.
In addition, the limits applicable to limitation-of-liability agreements, particularly in cases involving gross fault, may also become relevant in restricting the application of such clauses. As noted above, some views characterise these provisions as forms of limitation-of-liability clauses. From this perspective, the statutory limitations applicable to such agreements must likewise be taken into account.[7]
Under Article 115 of the Turkish Code of Obligations, it is not possible to exclude liability for gross fault. On that basis, where the main contractor fails to pursue, with due care, the processes necessary to secure payment from the employer, amounting to gross fault, and nevertheless relies on such clauses to withhold payment from the subcontractor, the relevant arrangement may fall to be assessed under Article 115 TCO. In such a case, the agreed allocation of risk would have been exceeded, and the application of the clause may be limited.
Examination through the lens of Two Hypothetical Scenarios
Against this background, the key distinction, in my view, lies in whether these clauses are applied in line with their intended purpose or in a manner that departs from it. The wording of the clause will be of course relevant in determining the threshold for this assessment. That said, in practice, I observe that most of the times the difference in approach reflected in the two scenarios below is often important in resolving concrete disputes.
In the such hypothetical first scenario, assume that the main contractor is generally receiving payments from the employer, although certain payments are delayed or subject to deductions. The main contractor has duly followed the certification process, submitted its payment claims, and exercised its contractual rights.
In such circumstances, some delays or shortfalls in payment may still occur. In this case, it may be reasonable to assess the subcontractor’s claim by reference to the amounts actually recovered by the main contractor from the employer. These types of delays or deductions fall within the range of risks that could have been anticipated at the time of contracting. The party expected to make payment to the subcontractor, in this case, the main contractor, has not misused this risk allocation. Accordingly, the application of a pay-if-paid or pay-when-paid clause would generally be consistent with the risk distribution on which the contract is based.
In the second scenario, however, a different situation may arise. The main contractor receives no payment, or only very limited payment, from the employer. This may be due to the main contractor’s failure to pursue its payment claims in accordance with the contractual procedures. For instance, the main contractor may have failed to submit its payment applications properly, even though the subcontractor has complied with its obligations. Alternatively, the main contractor may have refrained, without justification, from exercising contractual remedies such as suspension of works or termination, effectively allowing its exposure to increase on the assumption that the subcontractor will bear the financial burden.
In such a case, reliance on a pay-if-paid or pay-when-paid clause to withhold payment from the subcontractor becomes questionable from the perspective of good faith. What is at issue is no longer a reasonable and anticipated allocation of risk, but rather a use of the clause that departs from its intended purpose.
Accordingly, in real-life disputes, the central question will often be whether the main contractor has pursued the recovery of payment from the employer in a manner consistent with the principle of good faith, and whether the contractual allocation of risk has been exceeded. In other words, the issue is less about the formal validity of such clauses and more about whether they have been applied in good faith or used in a manner that goes beyond their intended function.
Drafting Considerations for Pay-When-Paid and Pay-If-Paid Clauses
The considerations relevant when drafting such clauses are closely linked to the thresholds discussed above. In other words, the way in which the contractual provision is structured will often shape how it is later interpreted and whether its application may be limited. For instance, where the subcontractor’s entitlement is made directly contingent upon the employer’s payment, that is a classic pay-if-paid arrangement, the threshold for its application may be regarded as higher. By contrast, where the clause is drafted as a simple mechanism governing deferral, a more flexible interpretation of the subcontractor’s entitlement may be possible.
That said, as with any contractual arrangement, it is preferable to consider the potential risks in advance and to draft such provisions in a more detailed manner. Although this is not always feasible in practice, particularly in projects of significant size and value, clarifying certain matters at the drafting stage may be beneficial. For example, the contract may specify the steps the main contractor is required to take in order to secure payment from the employer, and under what circumstances it will be deemed to have failed to do so. Such clarity can significantly facilitate the assessment of a dispute if one arises. Similarly, the maximum period for which payment may be deferred, or the types of delay that may be considered acceptable, may also be addressed.
In addition, the contract may define the extent to which the subcontractor is expected to tolerate delays, and at what point it may resort to remedies such as suspension of performance or termination. If such arrangements are included, this may help clarifying the parties’ expectations and narrowing the scope of potential disputes, particularly in large projects with complex payment structures.
At the same time, we know well that the parties do not pay attention to such details for rather niche issues in drafting their contracts. Construction contracts are often concluded between parties of unequal bargaining power, and negotiations may be constrained by practical considerations. Moreover, developing detailed provisions of this kind can be time-consuming and may not always be treated as a priority by the parties. As a result, many contracts contain pay-when-paid or pay-if-paid clauses expressed in relatively brief and general terms. In such cases, the interpretation of the contractual wording drafted in general terms, together with the general principles outlined above, becomes more decisive in resolving disputes.
Conclusion
Pay-when-paid and pay-if-paid clauses function as mechanisms through which payment risk is allocated within the contractual chain in construction projects. Under Turkish law, the starting point in assessing such clauses is the principle of freedom of contract. Accordingly, such provisions are not categorically invalid. That said, freedom of contract is not absolute, and the application of such clauses may, in certain circumstances, be limited by general principles and the practice between the parties.
In practice, the decisive issue is less the theoretical validity of these clauses and more how they are applied. Where they operate within a pre-agreed allocation of risk and are applied in a manner consistent with the principle of good faith, they can be regarded as a part of the contractual framework. By contrast, where the payment process is not properly pursued without good faith, and/or where such clauses are relied upon to leave the subcontractor’s receivables in a state of indefinite suspension, a different assessment may be considered.
—–
[1] Such arrangements, in a sense, rest on an underlying assumption—perhaps even an optimism—that the employer will ultimately make payment.
[2] For this reason, some authors in the literature suggest that, where there is uncertainty as to whether a contractual provision constitutes a pay-if-paid or a pay-when-paid clause, it should be interpreted in favour of the subcontractor and treated as a deferral-based arrangement rather than a condition affecting the existence of the debt.
[3] Ziya Akıncı, Milletlerarası İnşaat Sözleşmeleri, 1st ed., 2023, pp. 203-204; Gökçe Kurtulan, “Alt Yüklenici Sözleşmelerinde Yer Alan “Pay If Paid” ve “Pay When Paid” Ödeme Klozlarının Hukuki Niteliği ve Geçerliliğine İlişkin Bir Değerlendirme”, Jurix, 2025 (Kurtulan), pp. 737-740; Halil Akkanat, Alt Yüklenicilik Sözleşmesi, İstanbul, On İki Levha Yayıncılık, 2010 (Akkanat), pp. 89-91.
[4] Akkanat, pp. 89-91; Kurtulan pp. 739-741.
[5] Yeşim M. Atamer, Sözleşme Özgürlüğünün Sınırlandırılması Çerçevesinde Genel İşlem Şartlarının Denetlenmesi, Beta, 2001.
[6] Turkish Court of Cassation also acknowledges that provisions regarding standard terms control are not limited solely to consumer relationships but may also apply to contracts entered into between merchants. However, it is noted that, given the presumption that contractual terms are established with greater awareness in commercial relationships between merchants, such scrutiny will arise only in a more limited and exceptional manner: Turkish Court of Cassation, 11th Civil Chamber, Case No. 2016/4676, Decision No. 2017/3160, dated 29.05.2017.
[7] See Ferda Nur Güvenalp, Milletlerarası Özel Hukukta Alt Yüklenicilik Sözleşmeleri, İstanbul, 2025, pp. 75-76.
