Building development – Subcontract – “Pay when paid” clause – Insolvency – Clause in subcontract entitling defendant contractor to withhold payment in event of insolvency of employer – Insolvency defined in terms of section 113(1) of Housing Grants (Construction and Regeneration) Act 1996 by reference to four routes under Insolvency Act 1986 – Employer going into administration by self-certifying route introduced by Enterprise Act 2002 – Whether defendant entitled to withhold payment to claimant subcontractor – Whether pay when paid clause to be construed including all routes to administration under legislation as amended – Claim allowed
In December 2008, the defendant main contractor engaged the claimant subcontractor to fabricate and erect steelwork in a development. Clause 32 of the subcontract was a “pay when paid” clause, limited so as to comply with section 113(1) of the Housing Grants (Construction and Regeneration) Act 1996. It enabled the defendant to withhold payments due to the claimant in the event that it had not itself been paid by the employer, provided that it could show the employer was insolvent. Clause 32 defined insolvency terms that mirrored section 113(1) of the 1996 Act, by reference to the four principal routes to insolvency under the Insolvency Act 1986, namely (a) an administration order made by the court under Part II of the 1986 Act; (b) the appointment of an administrative receiver; (c) insolvent liquidation; or (d) the making of a winding-up order by the court.
The claimant sought payment from the defendant of £569,601 and £427,081 plus VAT, which had been awarded under two valuations. The defendant served a withholding notice in respect of each valuation, relying on clause 32. However, the employer’s insolvency had resulted not through any of the four routes identified in clause 32, but by means of self-certifying administration, a route introduced into the 1986 Act by the Enterprise Act 2002. In proceedings against the defendant, the claimant contended that since none of the four insolvency events had occurred, the employer was not insolvent within the meaning of that clause and the withholding notices were invalid. The defendant submitted that route (a) in clause 32 should be read as including all routes to administration under the 1986 Act as amended. It argued that a literal reading would give rise to absurdity, since, in the ordinary case, there was no longer such a thing as an administration order under Part II.
Held: The claim was allowed.
Where a contract or deed incorporated the provisions of a statute or subordinate legislation, there was no presumption either way as to whether the reference was to the law for the time being in force. The answer would depend on the proper construction of the words of incorporation in the context in which they were used: Ashworth Frazer Ltd v Gloucester City Council unreported 24 February 1999, Brewers Co v Viewplan plc [1989] 2 EGLR 133; [1989] 45 EG 153 and Debenhams Retail plc v Sun Alliance & London Assurance Co Ltd [2005] EWCA Civ 868; [2005] EGLR 34; [2005] 38 EG 142 applied. Read as drafted, clause 32 produced a commercially sensible outcome that, by referring to an administration order by the court, provided the claimant, and the defendant, with some measure of involvement prior to the employer going into administration: Sirius International Insurance Co (Publ) v FAI General Insurance Ltd [2004] UKHL 54; [2004] 1 WLR 3251 distinguished. Part II of the 1986 Act continued to exist and had two specific functions in that: (i) it contained the reference to Schedule B1, which in turn set out the three routes to administration in most ordinary cases; and (ii) it outlined the procedure to be followed should one of the special companies referred to in section 249 of the 2002 Act was be placed into administration. There continued to be such a thing as an administration order under Part II, in the form of an order made by reference to paras 10 to 13 of Schedule B1, as one of the three ways in which a company could be put into administration. That route provided the safeguard of enabling creditors such as the claimant and defendant to be heard before the decision to make the order was made. With the self-certifying option on the other habnd, a company could go into administration by filling out the relevant forms and the decision would be scrutinised only afterwards.
Consequently, clause 32 should be construed according to the plain meaning of the words and should not be rewritten to allow for the 1986 Act amendments. That conclusion was reinforced by the nature of the clause as a “pay when paid” clause, which was a form of exclusion clause that sought to pass on to the claimant, which had no contract with the employer or any obvious means of recovery against it, the risk that the defendant, which did have such a contract might not be paid under its main contract in respect of the subcontractor works. In those circumstances, the court should ensure that the defendant was kept within the four corners of its bargain. Further, since the subcontract had been entered into after the amendments to the 1986 Act had come into force, its wording should be viewed as a deliberate choice to include one particular method of administration to the exclusion of the self-certifying methods introduced by those amendments.
Sean Brannigan QC (instructed by Addleshaw Goddard, of Leeds) appeared for the claimant; Alexander Nissen QC (instructed by Gosschalks, of Hull) appeared for CR Reynolds, another subcontractor on the same project that had brought a separate claim for declaratory relief; Stephen Furst QC and Krista Lee (instructed by Wragge & Co, of Birmingham) appeared for the defendant.
Sally Dobson, barrister