Contracts - Beware of out of date clauses

Friday 12th March 2010

In a recent case, the main contractor Shepherd Construction Ltd,  issued withholding notices for the sums of just under £1 million to the sub-contractor William Hare Ltd.  

Shepherd relied on clause 32 of the sub-contract which provided for payment to be conditional on the contractor being paid by the employer first, where the employer was "insolvent". This type of pay when paid clause is permitted by the Construction Act. Shepherd argued that the employer was insolvent and that therefore as they had not been paid they did not have to pay William Hare.

The subcontract defined what insolvent meant for this purpose in a different clause.  The clause omitted to include a new quick method of insolvency created by the Enterprise Act 2002. The employer on the project, used this very method to enter into administration without obtaining an administration order.

William Hare Ltd who was the subcontractor and the claimant in this case, argued that Shepherd Construction Ltd could not rely on clause 32 to avoid payment as "insolvency" in the clause did not include the type of insolvency  to which the employer was subject.

The Court refused to interpret "insolvency" in clause 32 of the contract as including the new method of insolvency created by the Enterprise Act 2002.  It held that as drafted the clause was coherent. Furthermore, the party seeking to rely on the clause was the party whose standard terms were used and in the time that had passed between the changes in the law and the signing of the contract, Shepherd had not amended their contract nor had any of the parties sought to amend it so as to reflect a different intention.

Accordingly, Shepherd were not entitled to rely on insolvency of the employer as entitling them to refuse payment and by virtue of clause 32  had to pay William Hare.

What this means for you

It is time to have a good look at  the insolvency provisions in your contracts including the right to terminate  because of the other party's "insolvency".

If you have any queries or need further information please do not hesitate to contact Stephen Homer at s.homer@ashfords.co.uk

Ashfords LLP is regulated by the Solicitors Regulation Authority. The information in this note is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.