The third party insolvency exception to pay-when-paid clauses is a contraversial one. Many will say that is a shame that the Government did not take more notice of the industry and removed this exception when it published its proposed amendments to the Construction Act 1996 at the end of last year.
A wry smile no doubt crossed the faces of opponents to the exception when they read Coulson J’s judgment in William Hare v Shepherd Construction. Perhaps surprisingly, the sub-contractor did not find itself out-of-pocket because the employer went into administration. It is suggested in the judgment (paragraph 16) that the contractor knew about the employer’s financial difficulties when it entered into the sub-contract with William Hare. If that is true, it probably makes Coulson J’s judgment an even sweeter victory for William Hare. I’m sure it also leaves open the door to other claims against the contractor.
Everyone accepts pay-when-paid is unfair and places an unreasonable burden on sub-contractors, and those further down the contract chain. In this instance, the risk has squarely shifted back to the contractor. It may only be this way because Shepherd did not spot the need to change their “schedule of amendments”, but I suspect William Hare, CR Reynolds and others involved on the project will not care why. They will only care that they are not shouldering the financial burden for this project. William Hare is owed almost £1million. That’s a lot of money at any time, perhaps even more so during a recession.
I imagine there are lots of contractors and lawyers out there now, checking pay-when-paid clauses, to see if they have similar wording to clause 32.2 of this sub-contract!
