Fair Play and Killer Clauses

The British sense of fair play is famous throughout the world. We are rightfully proud of our reputation for allowing free speech and, within the criminal legal framework crafted by the State, freedom of choice to do what we want as long as we comply with the law and third persons are not harmed by our actions.

These principles extend into contract law and, as a starting point, contracting parties are free to agree to whatever they wish, subject to very few safeguards that politicians have sought to introduce through statute in order to provide a degree of protection for the commercially naïve. Those of you that read this column will know that rights to interest, to suspend work due to non- payment and the right to have construction disputes dealt with by adjudication are examples of the statutory rights that Parliament has seen fit to introduce into our common law in order to prevent weak and vulnerable entities being exploited by the bigger boys in the construction playground.

Keeping in mind the freedom parties have to contract on whatever terms they so wish, there are two clauses which are now being regularly introduced into Sub-Contracts which, if you are a Sub-Contractor, could be seriously bad for your wealth and possibly a corporate killer.

The first of these clauses is what I would call a “termination for convenience” clause. Under this provision a Contractor has the right to terminate the employment of a Sub-Contractor as it sees fit and when it sees fit, even if there has been no default or failure on the part of the Sub-Contractor. You might be excused for assuming that in such an eventuality the Sub-Contractor would be entitled to recover its lost profit and even its lost overheads on the element of the work that has yet to be undertaken BUT unless the Sub-Contract confers such right on you, think again.

The second killer clause which is now regularly appearing in Sub-Contracts is what I would call a “no payment on insolvency” clause. Under this provision the Sub-Contractor agrees to forfeit payment for all work done and not paid for, if it enters administration, a company voluntary arrangement or goes into liquidation. Now call me cynical if you wish, but just how tempting might it be for a Contractor to starve a Sub-Contractor of cash in order to trigger the subsequent insolvency of the Sub-Contractor in order to take advantage of this provision? Now, yes, I know that a party who is in breach of contract is not entitled to take advantage of its own breach and you might be able to have such a clause declared unenforceable if you can prove that the Contractor has deliberately underpaid a Sub-Contractor, BUT who will fund the Insolvency Practitioner’s attempts to prove this in court or arbitration in order to defeat the effect of the clause?

Now for all of you, just like me, who believed that the Courts should imply a duty to act in good faith in construction contracts in order to assist a Sub-Contractor being abused by a Contractor in either of the above situations, think again. The decision of the court in TSG Building Services v South Anglia Housing Ltd [2013] EWHC 1151 (TCC) now makes crystal clear that in the absence of a clearly worded express provision in the contract, no implied duty to act fairly exists. I am sure the Court did not intend to give a green light to the sort of corporate abuse which can be the effect of such a clause, and I can’t help but wonder if the TSG judgement really is consistent with the “British concept of fair play”, but we are where we are.

So, unless you want to see your company disappear down a black hole it might be a good idea to start thinking about what you are signing up to. Termination for convenience and no payment on insolvency clauses are just some of the examples of the sort of killer clause which might lead to the untimely demise of your life’s work. I know it is very boring but you really do need to think about what you are signing up to.

Peter Vinden is Managing Director of Vinden. He can be contacted by email at pvinden@vinden.co.uk. For similar articles on construction, corporate protection and dispute resolution generally, visit www.vinden.co.uk

Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations.