The case of William Hare Ltd v Shepherd Construction (Court of Appeal) discusses the effectiveness of “pay when paid” clauses.
S.113 of the Construction Act prohibits “pay when paid” clauses except where a third party employer is insolvent. The Act, as originally drafted, defined “insolvent” by reference to the Insolvency Act 1986. Shepherd included such a clause in its sub-contracts. In 2003 the Insolvency Act 1986 was amended, which in turn resulted in an amendment to s.113 of the Construction Act. However, for some reason in 2008 when Shepherd entered into a sub-contract with Hare it did not amend its “pay when paid clause”. Hare (and other sub-contractors) claimed substantial sums of money from Shepherd. Shepherd sought to rely on the “pay when paid” clause when its employer became insolvent. When the Court decided that the “pay when paid” clause was ineffective, Shepherd appealed. The appeal was rejected. Although the employer was “insolvent” as defined in the amended Insolvency Act, it was not “insolvent” as defined in the “pay when paid” clause. Shepherd argued that it was absurd not to interpret the sub-contract as being compliant with the amended definition on the basis that this is what a reasonable person would have understood it to mean.
The Court of Appeal disagreed: if a contractor wanted to avail itself of a “pay when paid” clause it must be drafted in accordance with the Act. Further, if a party wanted to limit its liability, clear words must be used in the contract terms. Any ambiguity or lack of clarity must be construed against the party seeking to rely on them.
COMMENT
The leading judge in the Court of Appeal made it clear in paragraph 2 of the judgment that Shepherd’s appeal would be dismissed, and the reasons given emphasise the care which needs to be taken when drafting construction contracts to ensure the terms (1) comply with the Construction Act, and (2) have their intended meaning and effect.
