WILLIAM HARE LTD V SHEPHERD CONSTRUCTION LTD

The true construction of the pay when paid clause in the sub-contract was that it only bit if the employer were the subject of a court made administration order under Part II of the Insolvency Act 1986 as amended, which it was not
 
 

Technology and Construction Court
Coulson J
25 June 2009

 
The true construction of the “pay when paid” clause in the sub-contract was that it only bit if the employer were the subject of a court made administration order under Part II of the Insolvency Act 1986 as amended, which it was not

The Construction Act, with one exception, bans pay when paid clauses in construction sub-contracts. That exception is when the employer becomes insolvent when that clause is sought to be invoked. The sub-contract was drafted for the main contractor in 1998, precisely reflected the wording of the Act and stated that its pay when paid clause operated when one of the employer insolvency events was a court made administration order under the Insolvency Act 1986. The sub-contract was entered into in 2008 with the wording as originally drafted ten years before. The contractor failed to amend the sub-contract to take into account the changes brought about by the Enterprise Act 2002. This Act amends the Insolvency Act by adding two further routes to administration. One is the appointment of an administrator by the company itself. The employer went down this route. The sub-contractor brought claims against the contractor which it accepted as being legitimate. The contractor therefore sought to invoke the pay when paid clause on the ground of the employer’s “self-certified” administration. It served a withholding notice based on this ground. The sub-contractor sought a declaration that the insolvency event in the sub-contract of a court made administration order under the Insolvency Act did not include the employer’s “self-certified” administration. The contractor’s case was that it would be absurd if the sub-contract provision for what in 1998 was the only type of administration under the Insolvency Act should not now be read as including these further routes to administration.
 
Coulson J disagreed with the contractor’s case. The sub-contract only referred to the making of an administration order by the court (and not to the further routes). A pay when paid clause is a type of exclusion clause. As such it needs to have clear wording to be effective. The sub-contract did not have that clear wording. The sub-contract was entered into some six years after the passing of the Enterprise Act. If it had been entered into before the passing of the Act, the contractor’s case might have been stronger. As it was the contractor had ample opportunity to take the changes made by the Act by changing the wording of the sub-contract, which it failed to do.
 
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