Many of us in the construction industry seem to be hearing the same old bed time story over and over again: A instructs B to do the work; B does the work; A does not pay B; for months the parties dispute the level of payment due; B becomes fed up waiting for payment and takes steps to wind up A.

Is this the most appropriate way to deal with a disputed debt?

In William Hare Ltd v Shepherd Construction Ltd, the judgment of which can be accessed here, the consequences of an anachronistic piece of contract drafting cost the losing party over £1 million. The issue here was whether or not the contractor under a building sub-contract could successfully pass the risk of the employer’s insolvency onto its sub-contractor by means of what is commonly known as a “pay when paid” clause.

In the case of William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC) (25 June 2009), the court declined to incorporate amendments made to an Act before the contract was signed which were not specifically referred to in the contract.

The facts

The provision of bonds by contractors as security has assumed renewed importance as a means of protecting employers, given the rising trend of contractor insolvencies.  

Company Voluntary Arrangements or CVA’s

Mead sought to enforce an adjudicator's decision of £332k. Dartmoor resisted on the basis that, as Mead was subject to a CVA, a stay should be granted on any judgment otherwise awarded to Mead. Mr Justice Coulson refused. There was no previous authority dealing with the point, but the Judge decided the following principles were relevant:  

In the construction industry, contractor insolvency delays projects, increases costs and may deprive the employer of remedies and third parties of meaningful warranty protection. In 2008, it was reported that the number of construction firms facing grave financial concerns was 547 per cent higher than in 2007 (Building, 14 November 2008). As contractor insolvencies are likely to increase in 2009, how can an employer protect its position at the start of a project and when contractor insolvency occurs?  

Contractual safeguards  

The purchase of off-site materials has always been an area fraught with risk for contractors and employers; even more so with the increasing threat of supplier insolvency.

Many local authorities are involved in large and expensive projects. It is often the case that costs and timetables for projects will be tight. Therefore any problems that arise on site or with the contractor will have serious consequences for the local authority and its ability to complete the project on time and on budget.

One of the worst headaches a local authority can face during a project is the main building contractor becoming insolvent during the course of a construction project.

The Case

This is the first time that the HGCRA has reached the House of Lords. The dispute here, which related to the payment part of that legislation, highlighted the tension between an employer’s payment obligations and the impact on those obligations of the contractor going into administration. Here, on 2 May 2003, Melville applied for an interim payment. No withholding notice was served. The final date for payment was 16 May 2003. Wimpey did not pay, but on 22 May 2003 administrative receivers were appointed.

Insolvency of a contractor or a sub-contractor during the course of a building project has the potential to incur other parties involved in the project in considerable costs.

Here are some of the things to bear in mind in case a contractor or sub-contractor becomes insolvent.