REUTERS | Jason Lee

Are you paying a debt, or are you just paying?

I’m not really into labels (designer or otherwise). For example, I tell people that the label “letter of intent” is potentially misleading. Better to call it a “letter”, so that you are more likely to read it with an open mind, and work out what it actually says.

I have been looking at the JCT Design and Build Contract, 2011 edition (JCT DB11) for a new client who wanted some bespoke amendments. I read the whole contract from start to finish. Not something I do very often, but a worthwhile exercise. It’s too tempting (and takes less time) just to look at the parts that are under discussion. Anyway, as I was reading through, I noticed that some of the payment obligations say that money is to be paid (or recovered) “as a debt” and some don’t.

Which payments are payable as a debt?

The JCT DB11 provides that, on termination, the balancing payment under clause 8.7.5 (termination by employer) is paid as a debt but the balancing payment under clause 8.12.5 (termination by contractor or either party) is not paid as a debt. In both cases, this is whether the employer is paying the contractor or the contractor is paying the employer.

The JCT are not the only publishers who use the expression “payable as a debt”. I’ve seen it used in many forms and contexts, but I wanted to look a bit more closely at the difference between those payments which are payable as a debt and those which are just paid.

A difference at enforcement?

It may be that the use of the word “debt” is intended to ease the process of enforcement. For example, an undisputed debt can be the subject of insolvency proceedings, without the necessity of obtaining a prior judgment. However, I am not convinced that the use of the word “debt” as a label either:

  • necessarily allows you to go down the insolvency route; or
  • is the only way of going down that route.

In 2010, in McGuinness v Norwich & Peterborough Building Society, the High Court made some general observations about the consequences of a payment being a debt, or damages for the purpose of bankruptcy proceedings:

“I have real doubt whether distinctions based on different causes of action (i.e. debt, account and payment, damages) satisfactorily address the purpose behind section 267(2)(b) of the [Insolvency Act 1986], which seems to me to distinguish between cases where there is no issue as to the amount of a liability, and cases where some process of assessment by the court is necessary, before the amount can be identified.”

In 2011, dismissing an appeal of the High Court’s decision, the Court of Appeal added obiter:

“…Although not necessary for the resolution of this appeal, my view is that “debt” in the earlier Bankruptcy Acts was treated by the courts as wide enough to include a liability in contract for damages in a liquidated sum.”

So I don’t think that you could say that a balance due under clause 8.7.5 could always be the subject matter of a statutory demand but a balance due under clause 8.12.5 could never be.

So what does “payable as a debt” mean?

Where there is ambiguity, we are allowed to use common sense to understand what is written in a contract. There is an old “common sense” expression that words in a contract need some work to do: it would be unlikely that they were put in for no reason.

We know that the use of the expression “liquidated damages” will not achieve the desired effect if the amounts to be paid are shown to be a penalty. However, it is also true that a provision which says that a fixed sum per week is to be paid by a contractor to an employer in the case of culpable delay could be effective, even if the expression “liquidated damages” is not used.

The label is not determinative. But it is helpful, because it tells you what the drafting is trying to achieve.

So you could say that “payable as a debt” means that the parties anticipate that the amount in question will be capable of enforcement as a liquidated sum.

Beware of labels

OK, we seem to have a meaning. But it’s still a label. Just like “liquidated damages” or “letter of intent”.

The amount in question will either be a liquidated sum or an unliquidated sum. If it is not a liquidated sum, the label “payable as a debt” will not be able to “make it so”.

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