William Hare Ltd V Shepherd Construction Ltd (No 2)

The true construction of the "pay when paid" clause in the sub-contract was that it did not cover an insolvency which was "self-certified" by the employer itself having appointed an administrator; and only bit if the employer were the subject of a court made administration order
 

 

WILLIAM HARE LTD V SHEPHERD CONSTRUCTION LTD (No 2)
Court of Appeal
Waller and Rix LJJ and Sir Scott Baker
18 March 2010
 
The sub-contract contained a “pay when paid” clause which reflected precisely the wording of the Construction Act and stated that it became operative, inter alia, when one of the employer insolvency events was a court made administration order “under Part II of the Insolvency Act 1986”. The sub-contract went on in the termination clause to provide that the contractor could terminate the sub-contract in the event of the sub-contractor’s insolvency “under the Insolvency Act 1986 or any amendment or re-enactment thereof”. The sub-contract in the form it was entered into was not amended to take into account the changes to the definition of insolvency made by the Enterprise Act 2002. The Enterprise Act amended the Insolvency Act by adding two further routes to administration. One of those routes was “self certification”, namely the appointment of an administrator by the company itself. Section 249 of the Enterprise Act (Insolvency Order) 2003 made consequential amendments to section 113(2)(a) of the Construction Act so that it provided that a company became insolvent when it entered administration within the meaning of Schedule B1 to the Insolvency Act for the purpose of the exception of insolvency to the rendering of a “pay when paid” clause in a construction contract ineffective. Schedule B1 to the Insolvency Act included the two further routes to administration.
 
The Court of Appeal held that the true construction of the “pay when paid” clause was that it did not cover an insolvency which was “self certified” by the employer itself having appointed an administrator and only bit if the employer were the subject of a court made administration order under Part II of the Insolvency Act 1986 as amended. There was no evidence in the instant case of any appreciation that an error had been made. The clause as worded did work notwithstanding that the number of court orders were miniscule as compared with self-certified administrations. The pay when paid clause was not truly "sharing" the risk of insolvency (as the contractor put it) and was instead relieving the contractor of a liability to pay which it otherwise had. It was therefore for the contractor to get a clause of this nature right if it wished to rely on it.
 
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