Delhi High Court announcement: Contractor cannot deny Payments to Sub-Contractor solely due to back-to-back contract

About the case

The Contractor was awarded Structural Work by the Principal Employer. Part of the work was subcontracted by the Contractor under an MOU executed by them. One of the conditions of the MOU was that the terms and conditions of the contract between the Principal Employer and the Contractor would be applicable to the Sub-contractor in respect of the portion of works sub-contracted to it. The Principal Employer, Contractor, and Subcontractor also entered into a tripartite agreement, defining the scope of work, the role of each party, and the relationship between them.

Business Context

Can the contractor deny payments to the sub-contractor due to alleged non-payment from the Principal Employer?

Solution

The Delhi High Court clarified that "back-to-back" obligations should only apply to the provisions explicitly incorporated by reference from the Letter of Award (LOA) to the Memorandum of Understanding (MOU).

Outcome

The Delhi High Court has laid down the following thumb rules that are to be followed by the Contractor in back-to-back obligations;

• The contractor cannot deny payments to the ‘Sub-contractor’ merely on the ground that the contract was on a back-to-back basis and it has not received payments from the main employer.
• The fact that the principal employer and the contractor are in a dispute also cannot be used as a ground to defer payments.
• The Contractor's claim of pending certification by the Principal Employer cannot justify withholding payments indefinitely when the Contractor had not disputed the correctness of the bills.
• In the course of execution of the work, the pendency of the bills with the principal employer for certification could be a ground for the contractor to defer payments to the sub-contractor until certification is complete.

Source

Delhi High Court Judgment dated 10.08.2023 in O.M.P. (COMM) 234/2023.