Author: Petra Sharp

Issue: April 2010

Publication: EADT

Sub-contractors often argue that the contractor should always ensure it is in a position to sue the customer in case of default, which the sub-contractor cannot do.  Additionally sub-contractors assert that when taking on a contract, it is the contractor’s responsibility to assess the credit-worthiness of the customer – as they don’t have the direct relationship with the customer.

A common arrangement for payment between contractors and sub-contractors is the ‘pay when paid’ clause.  There is no general prohibition against this – except under the Commercial Agents Regulations 1993:

“An agent selling goods for a principal is not paid unless he himself is implicated in the non-payment.”

A recent legal case in the construction industry highlighted that a customer using the ‘pay when paid’ clause had gone into administration - but the ‘pay when paid’ clause had a drafting error.  In this case, the administration had been under a self-certifying procedure which was not one of the insolvency events identified in the clause.

The contractor claimed that any reasonable sub-contractor would have known that the vast majority of administrations were ‘self-certified’ and that therefore the clause was clearly intended to apply.  Unfortunately, the court took the view that the contractor had to draft the clause to cover the actual event which had happened.  The contractor had not done so, and was therefore liable to pay the sub-contractor, even though it had not been paid itself. A correctly worded provision would’ve been enforceable!

Clearly, there is a fine line between the above, and decisions like the House of Lords in Chartbrook Limited v Persimmon Homes last year, where the court took a much more purposive view.  That was a case about whether a conditional payment in an agreement between developers should be paid, where the actual clause did not make sense due to a drafting error.  The court took the view that it was clear what was intended, and enforced the provision accordingly.

If you endeavour to ensure your legal documents are correctly worded, especially if sub-contractors are involved, and there could be losses by both parties, you can rest-assured of being protected against suffering a loss.

Petra Sharp
Partner and Corporate Law Specialist

This article is for general information purposes only and does not constitute legal or other professional advice. You should not act or rely upon this information.

Other articles