REUTERS | Toby Melville

Can’t pay, won’t pay (yet)

I recently gave a lecture to a group of construction industry professionals on legal developments in 2008. The case that caused most debate was Alan Auld Associates Ltd v Rick Pollard Associates and another [2008] EWCA Civ 655.

Termination for repeated non-payment

That case concerned a consultant (Dr Pollard) working for a contractor, who in turn was charging their client for Dr Pollard’s services. The case is about whether you can determine a contract for continual late payment (as opposed to non-payment), even in the absence of an express power to do so.

Quoting the judgment in the Court of Appeal (paragraph 20):

This was not a transaction in which the parties had a raft of mutual obligations to perform. Dr Pollard was to do the work for the authority through the claimant and the claimant was to pay him for it. It was Dr Pollard’s only source of earned income. Although this was not a contract of employment, the analogy is a close one. The judge [at first instance] found that the term as to the time for payment lay at the heart of the agreement. The breaches of this term were substantial, persistent and cynical. Not one payment was made in time; most were made inordinately late. These breaches occurred against a background of repeated complaints by Dr Pollard and broken promises by the claimant. Dr Pollard was entitled to assume that he would be treated in the same way for the remainder of the project which still had a year or so to run. As Dr Pollard said he was being used to fund the claimant’s business. The judge suspected that this was because he was seen as a soft target. In these circumstances, I think the judge [at first instance] was perfectly entitled on the facts as she found them, to conclude that the claimant was in repudiatory breach of the agreement, which entitled Dr Pollard to bring it to an end, as he did on 7 June 2006.

I made it clear to the audience that this was a one-off case on the facts.  I don’t think that this is authority for the general proposition that a sub-contractor can determine a main contract if money paid by the employer is continually passed on late – although, in an extreme case, it’s a route worth considering or maybe even threatening.  However, I have a concern that the next case that gets up to the Court of Appeal on broadly similar facts might go the other way…

Suspension?

Some might argue that a right to terminate for non-payment is not needed because of the right to suspend under the Construction Act 1996. But I wonder whether that is good enough – is it really practical to have to keep suspending work?  Instead, should sub-contractors be putting clauses into main contracts saying that they can determine the whole sub-contract, if money paid by the employer is passed on late (let alone not paid at all)?

A fence or an ambulance

One of the problems with suspension and determination is whether you ever actually suspend or determine: they are such damaging remedies in terms of relationship, reputation and the good of the project.  So I started thinking about what might be done at an earlier stage – “a fence at the top of the cliff rather than an ambulance at the bottom” (see my note at the bottom of this post: An aside: credit for the quote).

One of the ideas proposed in the latest edition of PPC 2000 is a project bank account enabling (in effect) direct payment of sub-contractors by the employer: see Hannah Fletcher’s article for more details. (See also my blog post on direct payment clauses.)

This system may hit the buffers (in terms of attractiveness to main contractors) if the provisions fall foul of either the ban on “pay when paid” provisions in the current Construction Act 1996 or the (possibly) forthcoming ban on “pay when certified” in the amended Act, after the LDEDC Bill 2008 comes into force.

An aside: credit for the quote

I did Google the rather over-used phrase – “a fence at the top of the cliff rather than an ambulance at the bottom” – to give credit to the person who originated it, but Google gave me over 60,000 entries.

The most promising was a poem apparently written in 1895 called “A Fence or an Ambulance” by Joseph Malins.

One version of this contains a third suggestion which is a deep swimming pool at the bottom to prevent injury. However, its moral is simple:

To rescue the fallen is good, but ’tis best

To prevent other people from falling.

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