Building development – Subcontract – “Pay when paid” clause – Insolvency – Contractual clause entitling appellant contractor to withhold payment to respondent subcontractor 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 under Enterprise Act 2002 – Whether appellant entitled to withhold payment to respondent – Appeal dismissed
In December 2008, the appellant main contractor engaged the first respondent subcontractor to fabricate and erect steelwork. 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 appellant to withhold payments due to the first respondent in the event that it had not itself been paid by the employer, provided that it could show that the employer was insolvent. Clause 32 defined insolvency in terms that mirrored section 113(1) of the 1996 Act, namely by reference to the four principal routes to insolvency under the Insolvency Act 1986: (i) an administration order made by the court under Part II of the 1986 Act; (ii) the appointment of an administrative receiver; (iii) insolvent liquidation; or (iv) the making of a winding-up order by the court.
The first respondent sought payment from the appellant of sums totalling £996,683.35, which had been awarded under two valuations. The appellant served a withholding notice in respect of each valuation, relying on the employer’s insolvency, which had arisen not through any of the four routes identified in clause 32 but by means of self-certifying administration, a course introduced into the 1986 Act by the Enterprise Act 2002.
In proceedings brought by the first respondent, it was held that the withholding notices were invalid and the appellant was obliged to pay the sums claimed, since none of the four insolvency events referred to in clause 32 had occurred and the employer was therefore not insolvent within the meaning of that clause. The judge held that clause 32 should be construed according to the plain meaning of its wording and could not be rewritten to allow for the 2002 Act amendments: see [2009] EWHC 603 (TCC); [2009] PLSCS 226.
The appellant appealed. It contended that: (i) a construction of clause 32 that ignored the subsequent amendments to the 1986 Act would produce an absurd result; and (ii) the drafting had clearly gone awry such that the court should construe the clause as covering all routes to administration.
Held: The appeal was dismissed.
It was doubtful whether the principles of construction relied on by the appellant applied to a “pay when paid” clause. Such clauses were ineffective unless the third party was insolvent, as defined by reference to the various routes to insolvency for a company. If a main contractor wanted to include an effective “pay when paid” provision in a subcontract, it would have to identify a way in which the third-party employer became insolvent as defined in the legislation. If it chose a way that did not accord with the legislation, because it mis-drafted the provision, there was no obvious reason why those principles of construction should come to its rescue. That was all the more so where the provision, as drafted, actually worked, even if a reasonable person would assume that it was not intended to be so limited and that an error had been made. Clause 32 was not only sharing the risk of insolvency but was also relieving the appellant of a liability to pay and it was for the appellant to ensure that a clause of that nature was drafted correctly if it wanted to rely on it. The dominant principle in such a case was that a party that sought to relieve itself from legal liability had to use clear words to achieve that effect: Dairy Containers Ltd v Tasman Orient Line CV (The Tasman Discoverer) [2004] UKPC 22; [2005] 1 WLR 215 applied; Investors Compensation Scheme Ltd v West Bromwich Building Society (No 1) [1998] 1 WLR 896 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 EGLR 119 distinguished. The judge had reached the correct conclusion for the reasons he gave.
Stephen Furst QC and Krista Lee (instructed by Wragge & Co LLP, of Birmingham) appeared for the appellant; Sean Brannigan QC (instructed by Addleshaw Goddard LLP, of Leeds) appeared for the first respondent; Alexander Nissen QC and Glen Davis (instructed by Gosschalks, of Hull) appeared for the second respondent, another subcontractor on the same project that had brought a separate claim for declaratory relief.
Sally Dobson, barrister