Pay when Paid and Insolvent Employers

"Pay when paid" clauses are supposed to be a concept of a bygone era. Main Contractors would seek to justify their inclusion in a sub-contract by arguing that it should not be the guarantor of payments that are due to pass from an Employer through to the Main Contractor before onward payment to its Sub-Contractors.
 
 

 

“Pay when paid” clauses are supposed to be a concept of a bygone era. Main Contractors would seek to justify their inclusion in a sub-contract by arguing that it should not be the guarantor of payments that are due to pass from an Employer through to the Main Contractor before onward payment to its Sub-Contractors.

 

It is clear that the drafters of the Housing Grants, Construction and Regeneration Act 1996 attempted to balance the concerns of both Main Contractors and Sub-Contractors in their drafting of Section 113 of the Act which currently says:

 

"113. - (1) A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent"

So take a typical scenario where we have an Employer who enters into a contract with a Main Contractor who then sub-lets part of the contract work to a Sub-Contractor. Appearing in the Sub-Contract is the following typical term relating to payments.

 

“All sums properly claimed and invoiced will be paid to the Sub-Contractor within 7 days of the Main Contractor receiving payment from the Employer”

 

Let’s then assume that the Employer becomes insolvent, is put into Administration and is unable to pay for the work done by the Main Contractor. Is the Main Contractor still obliged to pay the Sub-Contractor for work done by it?

 

If you said no, then you are forgiven. The wording of Section 113 of the Act would appear to support your view but there is more than this to consider.

 

A pay when paid provision is, in effect, an exclusion clause attempting to exclude a Main Contractor’s liability to make payment in a particular set of circumstances. There are a number of legal principles which relate to the enforceability of exclusion clauses in contracts, the most important of which is that, to be effective, the wording of the clause must be extremely clear before it can be relied upon.

 

This issue was addressed by Mr Justice Coulson in the Technology and Construction Court case of William Hare -v- Shepherd 1999 and subsequently by the Court of Appeal in 2010 in the ensuing appeal in which Lord Justice Rix said...


“The principle which the courts have always applied to clauses by which a party seeks to relieve itself from legal liability, i.e. that to do so they must use clear words, should, in my view, be the dominant principle. As Lord Bingham of Cornhill recently reiterated in Dairy Containers Ltd v Tasman Orient Line CV [2005] 1 WLR 215 "The general rule should be applied that, if a party otherwise liable is to exclude or limit his liability . . . he must do so in clear words; unclear words do not suffice; any ambiguity or lack of clarity must be resolved against that party" (my underlining). It is not therefore in my view open to Shepherd to argue that there is a lack of clarity in a provision that they drafted so as to relieve themselves from liability, and that the court should use the principles identified by Lord Hoffmann as applicable in rare cases to rescue them.”


So, if a Main Contractor proposes to rely on a “Pay when Paid” provision to avoid paying its Sub-Contractors where the Employer has become insolvent, it had better hope that provision is properly drafted.

 

Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Managing Director of Vinden and can be contacted by email at pvinden@vinden.co.uk