Legal Updates

A “back to back” clause will not apply when the non-payment to the main contractor is not related to the sub-contractor

March 23, 2018

International companies engaged in the provision of energy services contracted with an Israeli company to serve as a main contractor for the construction of a natural gas-based power station. The contractor contracted with a subcontractor to carry out earthworks, infrastructure and roads in the project with the calculation to be by way of a measurement agreement with a payment demand at the end of each month work and final account at the end of the project. When the subcontractor was not paid the main contractor contended that the agreement included a "back-to-back" stipulation that the subcontractor would not be entitled to receive payment as long as the contractor has not received the relevant payment from the customer.

The Court held that the purpose of the “back to back” clause in contracts between a contractor and a subcontractor is, as a general rule, to prevent a situation where the contractor will be forced to pay the subcontractor for work that has not been approved and the consideration not paid to the contractor for reasons related to the subcontractor.  Thus, “back to back" clause will not cancel the liability of the contractor towards the subcontractor in the absence of such contentions. Here there was no defense claim except for non-receipt of payment from the customer and it seems that the entire purpose of the proceeding was to gain time and in view of the conduct of the contractor, the court accepted the claim in full and ordered the contractor to pay ILS 300,000 legal costs.