In a landmark ruling between C R Reynolds Ltd and Shepherd Construction Ltd, the Court of Appeal prevented Shepherd Construction Ltd from relying on a ‘pay when paid’ clause, resulting in the firm releasing millions of pounds to its sub-contractors.
Shepherd Construction Ltd (‘Shepherd’) was the main contractor at the £100 million Trinity Walk retail development in Wakefield – the employer being Trinity Walk Wakefield Limited (‘Trinity’). Shepherd appointed various sub-contractors including the civil engineering firm, Reynolds Construction Ltd (‘Reynolds’).
The sub-contract contained a ‘pay when paid’ clause which asserted that if Trinity became insolvent, Shepherd did not have to pay Reynolds. However, Shepherd failed to update its sub-contracts to reflect the various amendments that had been made to insolvency law by the Enterprise Act 2002.
Critically, they failed to ensure that the clause would be triggered if Trinity went into Administration by the so-called ‘self-certified’ route, which, in 2009, is exactly what happened. Since the insolvency law regime was changed, it’s now become the norm for companies to adopt the self-certifying route, whereby an administrator is appointed by way of a board resolution. It’s now rare for a company to apply to Court for a formal Administration Order to be made, but this is what Shepherd needed before its ‘pay when paid’ clause kicked in.
The Court of Appeal made it clear that if Shepherd wanted to enjoy the protection of a ‘pay when paid’ clause, then it was Shepherd’s responsibility to clearly identify the way in which Trinity might become insolvent. If, due to a drafting error, Shepherd had chosen a method which didn’t work, then the Court of Appeal was not obliged to come to Shepherd’s rescue.
The case raises several key issues that construction companies and their advisors should take heed of, namely:
- While the Construction Act 1996 outlawed ‘pay when paid’ clauses, they can still be relied on in circumstances where the employer has become insolvent.
- If a party to a construction contract wishes to rely on a ‘pay when paid’ clause, it must ensure that it’s correctly drafted and has been updated to reflect the reforms to the insolvency legislation.
- Construction contracts often contain exclusion clauses. If these clauses are to be relied on, it’s essential that they’re clearly and correctly drafted. If they’re not properly drafted, the Court is very unlikely to enforce them.
- A sub-contractor should do all it can to resist a ‘pay when paid’ clause being imposed upon it.
Cases such as these are great examples of the Court’s strict approach to exclusion clauses in construction contracts, especially where such clauses seek to allow a main contractor to avoid paying a sub-contractor.
If there’s ever been a good time to dust down those contracts, it’s now. Keeping those ‘pay when paid’ clauses up-to-date and enforceable can make all the difference in court.
Matthew Fletcher of Gosschalks acted for the successful Claimant, C R Reynolds Limited in this case.
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