Absent friends

The number of cases regarding the amended Construction Act has been increasing lately. We now have our first decision on the provisions intended to clarify when an employer can avoid having to pay a previously certified sum to a contractor who has become insolvent. I think it is fair to say that it goes wider than most commentators thought.

These provisions are important, as contractor insolvency is still an all too frequent occurrence. Naturally, employers have no wish to make payments to an insolvent contractor without being able to take into account any cross claims resulting from the insolvency. To do otherwise would doubtless see money flushed away.

To recap, section 111(10) of the act provides that as long as the contract is drafted appropriately, an employer is not obliged to pay a certified sum if the contractor becomes insolvent after the last date a valid payless notice could be served. Instead, there will be a final account between the parties taking into account their respective claims.

This was intended to put the House of Lords decision in Melville Dundas Ltd (in receivership) and others vs George Wimpey UK Ltd and others (Scotland) – that a party could “contract out” of the payment provisions of the Construction Act in certain circumstances – on a statutory footing, albeit in a more limited form. The underlying principle is that an employer should not be penalised because a contractor has become insolvent after the last date a payless notice could be served. However, an employer will not be saved if it could have issued a valid payless notice but failed to do so.

The underlying principle is that an employer should not be penalised because a contractor has become insolvent after the last date a payless notice could be served

When it came into law, there was some debate as to the extent the employer could rely on this provision. In particular, it had been suggested that if the insolvency took place after the contractor should have been paid, the employer would not be protected.

The position has now been clarified by the Court of Appeal.

Wilson and Sharp Investments Ltd engaged Harbour View Developments Ltd as the contractor to construct student accommodation on two sites in Bournemouth under two separate building contracts, both of which incorporated the JCT Intermediate Building Contract 2011.

The parties fell into dispute and the building contracts were purportedly terminated by the employer on the grounds of a repudiatory breach in January 2014.

The contractor had an alleged claim of £902,506 arising out of three interim certificates issued under these two building contracts. The employer had failed to serve any valid payless notice and the contractor threatened to file a winding up petition against the employer.

Readers will be only too aware of the significant adverse consequences of a winding up petition being advertised against a company (even if the petition is ultimately dismissed). The employer therefore sought an injunction to prevent the contractor even issuing such a winding up petition. The first instance judge dismissed the application for an injunction and ordered the employer to pay the costs of its application.

Readers will be only too aware of the significant adverse consequences of a winding up petition being advertised against a company

This was despite the fact that there was a creditors meeting scheduled for the next day (11 July 2014) when it was expected that the contractor would be put into liquidation. This turned out to be the case.

The employer appealed to the Court of Appeal. They sought to argue that the proposed petition debt was disputed on substantial grounds (which would justify the injunction sought) because the contractor was now in liquidation. Therefore, no further sums were payable in respect of those interim certificates, irrespective of the failure to serve any payless notice because of clauses 8.5.3 and 8.7.3 of the building contracts. These provided that from the date the contractor becomes insolvent, the employer need not pay any sum that has already become due if the employer has become insolvent after the last date a valid payless notice could have been served.

The contractor argued that clause 8.7.3 only applied if the building contracts were terminated by reason of the contractor’s insolvency and the provisions had no application where the building contracts had already been terminated prior to such insolvency.

The court did not accept the contractor’s submission. It found that clauses 8.5.3 and 8.7.3 applied even if the contractor went into insolvency after the building contracts had already been terminated. It was clear that clause 8.7.3 was intended to operate after termination of the building contract. Further, there was nothing in section 111(10) that restricted its application to where the building contract had not been terminated or had only been terminated by reason of the contractor’s insolvency.

Perhaps the most surprising thing about this decision is the realisation that these pretty common provisions bite even in circumstances where a “payer” has failed to pay, as in this case, almost a year before the relevant insolvency occurred and where the building contract has already been terminated on completely separate grounds.

Steven Carey is a partner in the construction, engineering and projects team at Charles Russell Speechlys