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e d e o n P c i t o o i t m i n a v t & e r M r e a t g e r i e t a m r D S b e e n r 3 P bi S a g n r A a o n A i M n t s o a l i g a e t a c n n c i a M i i i o c c n n l n v i i r i i t r a u e n a i a a e r r u c c m m S i T T m l d m m om i e e u o o a s s j c u i u d C R e c a o l o A e e R l H H T e n n n n T g y I I n io it si t g & l e i i u t l s i b T D l n o n e I a i s o o n b i D E e i t a a u R & E n n t l i s g e o a & i M t u t s s R s u S e e M u p e g R s t D S & i u s g s t D p n e & n m i s c i i e t i y a n e l v D m v s e r v r C e r e w ge m u S e S e s i S g g v w g n a n y e e n i t o n i i i i R d a t t v d l C l i a n e i M ct a u g R u i u y B t it n B g Q c o L r i a e t r E g t a n g n Q n & g i E i n n ll o t i E M i l o C l i t L & e s t a s e d t r M o e n bit emen ervic & Po July c M o r i i t t v 2010 n A r a D S e g r e e 3 t r a i n S m n P b o e a i r n P t g s o a A a i M e t c g n c a i a n g ni i c v i n u n r n M i i n e o n l m i a u i S t r a S a i a m m l T r l c i c o i r i a e m se T a e d s o R R u u c m j o e u d l m o e H o A n n T H y g g C t i i In i n l s s & y i I e e b it n T l D D a i I o n i b n i t R E E a a o u t i n l e & & t n s t u u u so esig M M ustai l p e S o s s i R e g & S D c D n i t R i & spute ices v n y s r e e e s m v i m i S r v w e a r u D l g e g e i S n a C S o i v i n y e d t s t a g l i a i R t w g in tion u M t n i d t a c B l i y i a L & Bu itiga E Qu Energ ontr ing M n l L C l & t o i t e n t s M d e a s o o e r e t m P S c i it on ent e i M b g v n r & r a D o e A i n e 3 t m r a S a e P c n n g M i i s o a n n l e n i i n t a u c o a i i g a i r t c m c v n r i a i T r om un Se a me se dic ain

NEWSLETTER


Foreword With the recent news of the planned cuts in construction projects and some uncertainty over the potential for further cuts, we are again facing a period of uncertainty in the construction industry. In these challenging times a number of contractors have been successful in filling their order books for 2010/11 but will no doubt be concerned at the viability of the price should there be inflationary changes in the economy or currency fluctuations. Haleys are pleased to have worked closely along side a number of clients on a variety of projects to manage the

risk associated with the present climate and have helped to implement procurement measures aimed at capping liability and maximising recovery. Despite the economic pressures I am pleased to announce that Haleys has diversified its services and implemented measures to meet the decline in certain business sectors and the increase in others. This includes increasing its staffing levels to meet the demands for the 3D Cost Modelling Service that Haleys introduced in 2009 and which is proving to be desirable for developers, employers and contractors.

Haleys believe that investment in new technology and the diversification of business streams sees us well placed to deal with the future challenges and 2010/11 should prove to be an exciting year for us. To complement the changes our website will also be updated shortly to emphasise the full range of services available. In the meantime we wish all of our clients and staff the best for the Summer and hope that you all have a well earned break.

Steve Haley

Spotlight on New Employees

Kerry Bollington Commercial Manager/Associate I joined Haleys in May 2010 having previously worked in Main Contracting, Private Practice and Consultancy. I am a Chartered “QS” by trade and have spent the majority of the past 15 years working as a Commercial Manager and more recently in Dispute Management and Resolution. When I was offered the opportunity to join Haleys, I did so on the basis that they are a well established, progressive company who have an excellent reputation both as a Consultancy and Employer – I haven’t been disappointed!

– my first 3 months here have been really enjoyable and challenging. There is a real buzz across the business that comes from motivated staff who are able to deliver a quality service and a confidence that we have the range of expertise to serve our Clients. Personally I am really excited about the forthcoming launch of the Haleys 3D Modelling system – having had a taster from the technical staff in Purley, it really has to be seen to be believed!

Anton Malia Quantity Surveyor Having come from an electrical and telecom's engineering back ground in the forces, followed by 4 years at a major Mechanical and Electrical Contractor as an Mechanical and Electrical QS, along with an 8 month contract based role at Staythorpe Power Station, my first month with Haleys has been to hit the ground running at a new Bioethanol production facility, acting as the Electrical &Instrumentation QS. As well as the normal QS duties, my main role here is

that of Contract Administrator as well as carrying out a full reconciliation of the Bill of Quantities to the construction drawings, followed by a full site re-measure. This project is unique given its sheer size, scale, number of contractors and operatives and that it is already presenting a number of challenges including coordination issues and extensions of time, all leading to a normal days work for an Electrical & Instrumentation QS.

Full CV’s for Kerry and Anton, along with every member of the Haleys team are available upon request.

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Email: enquiries@haleys-ltd.com: Website: www.haleys-ltd.com


Recovering the Cost? The cost of tendering commercial projects on a speculative and competitive basis are generally seen to be a necessary evil although they amount to a substantial running cost and overhead throughout construction industry.

The plans and other tender documents were sent to several contractors who had expressed an interest in carrying out the proposed works for tendering purposes.

Contractors who have been involved in Design & Construct tenders will know exactly how costly speculative tendering can be and will no doubt be selective in the number of bids taken on in one year.

Importantly in this case, the tender documents stated that the “Tendering procedure was to be in accordance with the principles of the Code of Conduct for single stage selective tendering 1996”.

Parties involved in PFI Contracts will also be familiar with the extensive cost of bidding for work especially where the bid was unsuccessful and where there is no prize for coming second. However, the recent cancellation of BSF and other Public projects at a time of recession in construction may see rejected bidders running to their legal advisors, particularly where the bidders were involved in framework type agreements, and we may see some serious reconsideration of the intention to recover the cost of bidding for projects that have been or are likely to be cancelled where such projects had to all intents and purposes been awarded in principle. We have previously looked at the circumstances in which tenderers can recover the costs of compiling and submitting a tender, particularly where the lowest bid was not accepted. The case we considered involved the decision in the Northern Irish case of J & A Developments Limited -v- Edina Manufacturing Limited (2006). This case provided some hope to contractors seeking to recover the costs of unsuccessful bids, particularly where the party inviting the tender didn’t play strictly by the rules. The facts of the case were as follows: Edina was an Employer who engaged an architect to draw up plans and prepare other tender documents for the erection of workshop offices and associated works at its premises on an Industrial Estate in West Lisburn.

unsuccessful bidder), the general acceptance seems to exist that it happens all the time and so we learn to

One of the prospective tenderers was J & A Developments an experienced contractor.

The Code of Conduct is a standard publication and it included the following statement:“[the code] strongly deplores any practice which seeks to reduce any tender arbitrarily where the tender has been submitted in free competition and no modification to the specification, quantity or conditions under which the work is to be executed or to be made or to reduce tenders other than the lowest to a figure below the lowest tender.” Edina received 6 bids in total of which the bid submitted by J & A was by far the lowest. However, for reasons best known to Edina, it now decided that it did not simply want to accept the lowest bid and instead it entered it into negotiations with the three lowest bidders, which including J & A Developments as the lowest bid. During the course of those negotiations, all bidders were invited to make arbitrary reductions to their bids, however J & A declined to make any reduction to its bid, presumably as it knew it was already the lowest. Unfortunately for J & A the second lowest bidder succumbed to commercial pressure and reduced its price by £25,000.00 thus now making it the lowest price and it was duly awarded the contract by Edina. This “commercial dealing” or “horse trading” has been common practice in the construction industry and whilst it is unpalatable (particularly to the

live with it. However, J & A were not feeling so accommodating and they duly commenced court proceedings against Edina for damages for the breach of the tendering code and the implied contract between the parties. In the court action, J & A relied upon the earlier decision made in the case of Blackpool & Fylde Aero Club Ltd -vBlackpool Borough Council (1990), in which the Borough Council sent out tenders for a concession to operate pleasure flights from Blackpool Airport. The tenders to the potential operators included a statement that the Borough Council would not be bound to accept the lowest bid and that it would not consider any bids submitted after the specified return date. Whilst the Aero Club did in fact submit a bid on time the council’s administrative staff unfortunately failed to clear the letterbox on time so the bid was not considered in the formal bid opening process. The club considered that it had been unfairly treated and commenced its own actions. The matter ultimately ended in the Court of Appeal, where it was decided that although collateral contracts were not implied lightly, the Borough Council had shown a clear intention to be contractually bound to consider all bids

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which were submitted on time. By failing to consider the bid which had been submitted on time by the Aero Club, the Borough Council was adjudged to be liable for a breach of the collateral contract that it had entered into with the club. Therefore, J & A also argued that a collateral contract could come into existence between an employer and a tendering contractor and that, in all the circumstances, a collateral contract had been formed between Edina and itself which Edina had breached in carrying out the “horse trading. In their defence, Edina asked the court to make a distinction between the circumstances of the Blackpool case, which concerned a Public body seeking competitive tenders as a matter of Public Policy, and the circumstances of their case where Edina was a private body simply carrying out a commercial business arrangement. However, the court rejected that distinction and commented that, although there is a statutory distinction between a Public body and Public Policy and a private employer, no such distinction could be made in common law with regard to a contractual arrangement. The court therefore decided that, by incorporating the Code of Procedure into the tender documents, a collateral contract had been formed and it was a term of the collateral contract between Edina and J & A that Edina would comply with that procedure. In the event that Edina failed to do so, they would be in breach of that collateral contract. Thus the common practice that Edina had followed of inviting the three lowest bidders to arbitrarily reduce their bids was adjudged to be contrary to the Code of Procedure and a breach of the collateral contract. In reaching its decision the Court had also considered the case of Fairclough Building Ltd -v- Port Talbot Borough Council (1992), in which the Court of Appeal had stated:-

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“A tenderer is always at risk of having his tender rejected either on its intrinsic merits or on the ground of some disqualifying factor personal to the tenderer. Provided that the ground of rejection does not conflict with some binding undertaking or representation previously given by the customer to the tenderer, the latter cannot complain. It is not sufficient for him to say, however understandably, that he regards the ground of rejection as unreasonable.”

It is unreasonable and inequitable to believe that the parties who laid out the money in compiling the detailed and competitive bids should have expected that the entire process could be arbitrarily cancelled.

The court decided that by inviting the tenderers to make arbitrary reductions to their bids, Edina had directly breached the Code of Procedure written into the tender documents, which were themselves contract documents. Consequently Edina was in breach of contract and liable to J & A in damages.

END

J & A sought recovery of damages in the form of the costs of preparing their tender bid and the loss incurred by not carrying out the works. The court awarded J & A the cost of the bid preparation and damages representing the loss of profit it would have earned had it performed the contract, reduced by the amount of the recovery made by J & A for work carried out elsewhere by the staff who would have been employed by Edina. The question that will no doubt arise will be whether or not the bidding procedures for BSF and frameworks generally have created a collateral contract by the insertion of a procedural code or some other express stipulation, which has the same or similar effect to the Code of Procedure in the J & A Developments case. Whilst there are distinct differences as the J & A case revolved around the award of a contract to another tendering party thus creating the breach of contract whereas we are presently in the midst of a swathe of Public Spending cuts, there seems to be some linkage from the point that contractors entered into preferred bidder arrangements with the sole intention of being awarded some work from which it knew it would recover its tendering costs.

We will therefore have to wait and see whether or not the principles of J & A will be extended to the reported £100M losses accrued in the likes of BSF alone in respect of the abortive tender costs.

The articles contained within this Newsletter should not be taken to be, or used as, a statement of law, or for the purposes of giving advice to any party on any legal or contractual matter or dispute. Haleys therefore do not accept any responsibility for any such use or purported use and in all cases parties should seek appropriate and specific legal advice for specific cases.

If you would like to discuss the circumstances of any of your contracts or projects, or you require further information on the services provided by the Contracts & Legal Services Division, please contact either of the following:Peter Graham on 0845 367 8820 or The helpline on 0800 092 9272 or alternatively at constructionlaw@haleys-ltd.com

WE ARE ON THE MOVE On Friday 27th August 2010, our Nottingham office will be relocating to;

2 King Street Nottingham NG1 2AS Contact numbers will remain the same, Tel: 0845 367 8820, Fax 0845 367 8820.

This office move does not affect Haleys RAP who are based at Jaradale House, Gregory Boulevard, Nottingham, NG7 6LB, who can be contacted on Tel: 01159 623205

Email: constructionlaw@haleys-ltd.com: Website: www.haleys-ltd.com


3D Cost Modelling

Improved Processes that Adds Value

Haleys continue to invest in the development of new Software and IT equipment, to enable Haleys to produce 3D modelling and model based material take-offs. The Software is flexible enough to produce Cost Models for all forms of building and infrastructure within all sectors of construction and engineering, creating virtual prototypes of the physical assets. Cost Plans and Bills of Quantities are automatically populated with quantities from the model, giving Haleys the ability to detail and estimate costs that can be maintained throughout the project lifecycle. The 3D process can be applied at any stage of project development, from inception through to operation, with a corresponding increase in detail, creating a tool which can be easily and effectively amended to consider engineering options and reflect changed requirements. It is ideal for value engineering exercises as work can be carried out in a live environment for instant decision making. In conjunction with this investment, we have a library of mechanical, electrical and plumbing items (in accordance with SMM7), this library will be uploaded to enable quantities to be generated directly from MEP models. Screen dump from Revit

This further investment in technology will benefit Haleys clients in the following ways; Improved Cost Control Added Value Virtual Prototypes Reduced Cost by Improving Processes Speeds up drawing and measurement process by a minimum of 50%

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How Much? Proposed amendments to the Housing Grants, Construction & Regeneration Act 1996 have been debated over many times. Now we look at the changes that have been drafted and consider their effect on the payment provisions contained in Construction Contracts and whether or not it will finally bring about a certainty as to how much we get paid (and when). After several years of consultation the last government has included the proposed amendments to the Housing Grants, Construction & Regeneration Act 1996 (the Act) in Part 8 of the Local Democracy, Economic Development and Construction Act 2009. One key amendment that was previously mentioned in Haleys Legal Bulletin August 2008, is the introduction of a provision to allow the party receiving payment (the Payee) to issue a payment notice in the event that the party making the payment (the Payer) fails to do so. This is a significant change in the procedure and will require very careful consideration by those drafting and entering into contracts, as well as those administering payment procedures. However, the first significant change to the Act since its introduction 12 years ago cannot be implemented until another piece of legislation, the Scheme for Construction Contracts, has been revised to account for the changes to the Act. The Department for Business Innovation and Skills has commenced a consultation process seeking views on the changes required to the Scheme in order to make it compliant with the revised provisions of the Act. A consultation paper is available and can be accessed at the following link: http://www.bis.gov.uk.

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The intention of the amendment is to try and stamp out the culture of not wanting to give a Section 110 Notice because it is an arduous task to perform in a rigid timescale (particularly where payment periods are over a weekend) In short, the change is aimed at overcoming the failure of parties to issue Section 110 notices of amounts due and to give the Payee the opportunity in default where notices aren't issued to state what the payment should be. This is

explained further as follows: Whilst it has been law for some 12 years that Section 110 of the Act requires that every construction contract must include a provision whereby the payee receives a notice telling him how much is due and how its been calculated not later than 5 days after the date on which such payment became due, it is clear that only a small percentage of payers actually operate the mechanism properly and in some cases actively seek to avoid it. One constant problem is that in the event that the payer fails to issue the notice within the required timescale the amount due for payment is uncertain, since the ‘amount due’ will always be the amount that should have been ascertained and would have become due in accordance with the contract and

NOT in default the amount that was applied for. Only one standard form ever achieved this (the now superseded JCT WCD 1998). This leaves the Payee in limbo in respect of what he is entitled to receive and leaves him in a precarious predicament in the event he is not paid as much as he expected. Does he dare suspend and if he does, will he be in breach of contract? Thus many payers simply disregard the requirements to issue the Section 110 payment notice within 5 days of the date when the payment becomes due and in default tend to issue a combined notice of amount due together with any amount to be withheld, the legitimacy of which is questionable in some cases that we have seen. To try and overcome this problem the amended Construction Act now includes Section 110A which requires all construction contracts to provide for the giving of a payment notice by the payer within 5 days of the date when the payment became due. In addition the new Section 110B now provides that if the payer fails to provide the payment notice as required by the Act/Contract then the payee is permitted to issue his own payment notice at any time after the date on which the payer’s or specified person’s notice should have been given. The Act has therefore been amended to require that in the event of the failure of the Payer to issue the required Section 110A Notice, the Payer is now automatically obliged to pay the sum notified by the Payee under Section 110B.

The Housing Grants, Construction & Regeneration Act 1996

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However this is not a licence to print money and the issue of such a notice by the Payee does not extinguish the other rights and remedies of the Payer including the right to withhold payment in accordance with Section 111. Therefore, the Payer can still ‘withhold’ sums that are not due and/ or can abate from sums identified as due within the Notice from the Payee. Effectively the Payer does this by issuing a notice to ‘pay less’. The ‘notice to pay less’ must identify the sum that the payer considers is due on the date the notice is served and further identify the basis on which that sum is calculated. The sum identified in a compliant notice to pay less then becomes the sum due for payment. The parties are free to agree upon the timing for the issue of the notice to pay less within their contract. In the absence of such agreement the provisions of the Scheme (once drafted) will apply.

Notice.

CONCLUSION

OBLIGATIONS

Once the Scheme is updated and the amended Act is brought into force parties to construction contracts will have to pay considerable attention to the timing and details of the payment provisions in any contracts entered into.

Having considered the foregoing changes the following potential dilemma arises. If a Payer is to issue the payment notice within 5 days of the payment due date and if the final date for payment is 28 days after the due date then the total period from becoming due to receiving payment is only 28 days. However, where the Payer fails to give the notice required within 5 days then within 7 days following the payee becoming aware of the failure, the Payee gives a notice to the Payer pursuant to Section 110B the final date for payment is delayed by the period of 7 days and the Payer has just extended the payment period from 28 days to 35 days, albeit by having to accept the Payee’s assessment of the payment due. However, this is not the guaranteed outcome.

Furthermore parties will have to ensure that they comply with the requirements relating to the timing of payment notices. Payers or their representatives must issue payment notices in a timely fashion where they are required to do so to avoid the Payee issuing its own notice in default. Similarly parties responsible should ensure that any relevant ‘notice to pay less’ is issued within the prescribed timescale and is fully compliant as regards its detail.

The Scheme currently provides at paragraph 10 of Part 2 that a withholding notice is to be issued not later than 7 days before the final date for payment. The Department of Business Innovation and Skills’ consultation seeks opinion as to whether the notice to pay less should be issued within the same time limit, i.e. not later than 7 days before the final date for payment or some other period. TIMING

THE STING!

Where the contract provides for the Payer or Specified Person to give the notice specifying the amount due for payment and the Payer or Specified Person fails to give that notice within the required timescale the Payee should issue its notice pursuant to Section 110B immediately.

If the Payer rejects the Payee’s assessment included in its notice, he can still issue a notice to pay less in accordance with Section 111 of the Act specifying the revised amount that he considers is due. The contract may provide for this to be issued as late as 1 day before the final date for payment. In such an instance the Payer would therefore not only have managed to have the payment period extended by 7 days (as above) but now is still only obliged to pay the amount that it considers to be due as set out in the notice to Pay Less.

This is because Section 110B provides that the final date for payment is postponed by the same number of days as the period between when the Payer or Specified Person should have issued the notice and the date of the Payee

In particular parties will need to identify whether or not such contractual provisions are consistent with the requirements of the amended Act or whether the relevant parts of the Scheme are to apply.

Payees should ensure that they issue payment notices as required and when in pursuance of Section 110B of the amended Act, immediately upon the default of the Payer and should ensure that they are fully compliant. One issue that should become clearer is where a notice of amount due issued by the payee is not challenged and payment is not received by the final date for payment, it should make the matter of suspension somewhat more academic. The End

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Construction Law Services Helpline Haleys Construction Law Services has continued to develop in all areas of construction including Building, Civil Engineering, M&E Services and Specialist areas such as Water and Power. It prides itself on being able to provide solutions to both contentious and noncontentious matters. Haleys provide the following services to the UK construction industry: Contract Reviews & Negotiations Drafting of Contracts Claim Preparation Forensic Planning Expert Witness Opinions Adjudication Arbitration Litigation Support

FREE Telephone Helpline The service will operate from 10AM until 3PM on weekdays and will provide free initial advice in respect of Construction Law and related issues. The service will be supported by a team of legal consultants with construction industry backgrounds and formal qualifications. The helpline will provide initial advice of up to one hour on legal, commercial or contractual issues and will also explain the practicalities and cost implications of any detailed advice that may be required.

Helpline number 0800 092 9272 Alternatively you can email us from the link below and we will respond to you before close of business the same day.

constructionlaw@haleys-ltd.com

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Email: constructionlaw@haleys-ltd.com: Website: www.haleys-ltd.com


Withholding & Insolvency The problem of seeking to withhold payments in situations where insolvency has occurred has been debated and tried in the courts. However the situation has now become more complex following recent court judgments. We review two cases and the implications that these cases may have on construction contracts . Following its introduction on the 1st May 1998, Section 111 of the Housing Grants, Construction and Regeneration Act 1996 (the Act) prevents the withholding of an amount that has been found to be due for payment under a construction contract beyond the final date for payment unless a valid withholding notice has first been issued. The wording of the provision is very clear therefore it would seem logical for it to apply in all situations. However, withholding in insolvency situations can prove to be more tricky than expected, as demonstrated by the cases of Melville Dundas Ltd (in receivership) -vGeorge Wimpey UK Ltd [2007] UKHL 18 and William Hare Ltd -v- Shepherd Construction Ltd [2009] EWHC. The former case revolved around the ability of an Employer to withhold payment from an insolvent Main Contractor (even though a valid withholding notice had not been issued), and the latter about the validity of a Main Contractor’s withholding notice that had been issued to a sub-contractor upon the Employer going into Administration. Melville Dundas Ltd (in receivership) -vGeorge Wimpey UK Ltd [2007] UKHL 18 In this case the Main Contractor (Dundas) had entered into a contract with Wimpey for the construction of their housing development in Glasgow; the contract being based on the JCT with Contractor’s Design 1998 conditions. Part way through the construction work Wimpey failed to pay an amount that had become due, despite the fact that it had not issued a valid withholding notice in respect of it. Six days after the final date for that payment Dundas was put into administrative receivership, which, under the terms of the contract constituted insolvency and therefore provided Wimpey with the right to determine the contract. Wimpey promptly exercised that right and

on reliance of the contract’s determination provisions refused to make any further payments to Dundas; including the interim payment that in the ordinary course of events should have been made by the final date for payment ( prior to them going into administrative receivership).

to make the payment upon Dundas becoming contractually insolvent) did not exist at the time; it only arose after the latest date for the issuing of the withholding notice for that payment, and therefore could not possibly have been included within it.

As a consequence of this, the Administrative Receiver commenced proceedings for the recovery of this payment, claiming, somewhat unsurprisingly, that in the absence of a valid withholding notice Wimpey should have paid the amount found due by the final date for doing so, and that Dundas therefore remained entitled to it.

It seemed to the Law Lords that the retrospective affect of clause 27.6.5.1 was not a circumstance that Parliament had anticipated when passing the Act.

To cut a long story short, the matter eventually reached the House of Lords, who decided by a 3 to 2 majority that Dundas was not entitled to the payment despite the absence a withholding notice. In arriving at their decision the Law Lords considered the wording of both the contract’s determination provisions (in Give me my money

particular clause 27.6.5.1) and Section 111 of the Act, but could find no way of reconciling the two; the wording of the two provisions were entirely incompatible with each other. The reason for this was that Wimpey’s right to refuse to make further payments under clause 27.6.5.1 applied not only to any future payments, but also to any rights of payment that may have accrued within a period of 28 days prior to date of the notice of determination of the contract. In this case the right to payment of the interim amount claimed by the receiver accrued only 6 days prior to this date and was therefore caught by clause 27.6.5.1. The problem for Wimpey was that it was impossible for them to have issued a withholding notice based on the ground they needed to rely on within the timescale for doing so; that is, by the latest date for issuing the notice. This was because the ground in question (the right to refuse

In arriving at their decision the Law Lords had considered the likely intention of Parliament when it had included Section 111 in the Act, and concluded that the mischief that the provision was included to address was the withholding of stage or periodic payments without notice. As is now generally accepted, Section 111 is aimed at preventing a paying party from withholding any sums from an amount that would otherwise be payable without first advising the payee about it; and so providing them with an opportunity to challenge the proposed withholding prior to its imposition. Since the strict application of Section 111 would in this instance have effectively nullified the retrospective application of the clause 27.6.5.1, the Law Lords had to decide whether Parliament had intended for this statutory provision to override the parties’ freedom to include such clauses in their contracts (the freedom of contract principle). The Law Lords decided that Parliament had not so intended, and held that where in the nature of things it was not possible for notice of a ground for withholding to be given within the statutory time frame, the provisions of Section 111 of the Act should not apply. Apparently in those limited circumstances a party can lawfully withhold payment after the final date for payment even though a valid withholding notice has not previously been issued. With respect to this decision (which could have gone either way), it seems odd that the majority of the Law Lords favoured a decision that allowed Wimpey, who had breached a contract (by failing to pay a sum due by the final date for payment), to rely on the possible, or even likely, consequences of that breach (the appointment of the Administrative Receiver and the subsequent determination of the contract) in order to retain monies (by virtue of the

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retrospective affect of clause 27.6.5.1) that should otherwise have been paid over.

regarded as being insolvent by setting out word for word the phraseology of Section 113 of the Act. However, the wording

This is especially so when Wimpey effectively gained a benefit by keeping the monies as it then increased its’ security to cover any costs which they may in future have incurred as a result of the very determination that they probably promoted in the first place by failing to pay monies that should have been paid by the final date for payment; and which may well have staved off the appointment of the receiver. Although the determination provisions of the JCT Design and Build contract were clearly not drafted with the intention of allowing a party to circumvent the provisions of Section 111, this would seem to be that affect of the decision. Given that the objective of the Act was to protect the cash-flow of contractors, it is disappointing that the majority of the Law Lords gave a decision which appears to have opened the door to the inclusion of provisions, such as clause 27.6.5.1; the affect of which could undermine that objective. Hopefully this will not encourage the inclusion of similarly worded clauses for other grounds of withholding. However, in the current harsh and sometimes cynical world of construction, this would not seem to be beyond the bounds of possibility. Since such clauses would seem to introduce an element of uncertainty to the payment provisions of contracts to which they apply, it begs the question whether the House of Lords missed an opportunity to promote good cash-flow within the construction industry when it favoured the principle of freedom of contract over the strict application of Section 111? William Hare Ltd -v- Shepherd Construction Ltd [2009] EWHC In this case Shepherd refused to pay over amounts that had become due for payment because its Employer had gone into Administration. Shepherd relied on the ‘pay-when-paid’ provision set out at clause 32 of the sub-contract which was given effect by Section 113 of the Act. Section 113 renders ‘pay when paid clauses ineffective except to the extent that they relate to payments owing from insolvent companies; in which case payments ’downstream’ in the contractual chain can be retained until payments have been received ‘upstream’ from the insolvent companies . Clause 32 of the sub-contract defined the means by which companies could be

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the reference to administration by way of a court order in clause 32 of the sub-contract should, as a matter of commercial common sense, have been construed as including the other routes to administration subsequently introduced by the Enterprise Act. The court however disagreed with Shepherd’s interpretation, preferring instead an interpretation of clause 32 that was based on the ordinary plain meaning of the words used in the contract; thus limiting the meaning of insolvency by administration to the issuing of an administration order by the court. The court considered the fact that ‘pay-when-paid’ clauses effectively represented exclusion clauses, which ordinarily a court would construe narrowly. The court could also foresee circumstances in which the parties could consider it appropriate to exclude the self-certifying methods to administration.

adopted by Shepherd for clause 32 was the same as that set out in Section 113 of the original Act and prior to the amendments made to it by the introduction of the Enterprise Act 2002 and the Enterprise Act 2002 (Insolvency Order) 2003. These new statutory provisions redefined the ways in which a company could be put into administration. Thus Shepherd’s clause 32 only included for a company going into administration by way of court order, and critically for Shepherd, did not include the additional routes that a company could enter into administration as a result of the introduction of the Enterprise Act 2002. These new routes are now referred to as ‘self-certified’ administration, so that in addition to a creditor obtaining a court order, the holder of a floating charge over a company’s assets or the directors of the company itself can appoint an Administrator. In this particular case the latter of these additional routes was taken by Hare (Shepherd’s Employer). Thus, Hare argued that, since the definition of insolvency set out in the sub-contract was restricted only to administration by the making of an Administration Order by a court, Shepherd’s Employer, who had ‘selfcertified’, could not be regarded as being insolvent within the meaning of clause 32 of the sub-contract. On the strength of this Hare claimed that Shepherd could not rely on its ‘pay-when-paid’ clause as a valid ground for withholding payment. Shepherd, on the other hand, argued that

The court was also influenced by the fact that following the introduction of the Enterprise Act, a period of 5 years had passed during which Shepherd could have amend the wording of its sub-contract to include the self-certifying routes to administration but had failed to do so. As a consequence of the court’s decision, Shepherd’s ground for withholding payment was nullified rendering the withholding notice invalid. Therefore Shepherd was ordered to pay the sums due even though it had not received the sums from its Employer who, according to current statutory definitions, had become insolvent and was incapable of paying Shepherd. CONCLUSIONS

Both of the above cases exemplify that in the case of insolvency, the withholding of payments or challenging withholding may not be as straight forward as first thought; and it is likely to depend on the precise wording of the contractual provisions that provide the grounds for so doing. There is an increased risk of insolvency as a result of the current economic climate, and it is foreseeable that employers, contractors and sub-contractors will all continue to experience financial difficulties for some time. Therefore we would urge all parties entering into contracts to carefully consider the wording of any insolvency or withholding provisions in order to avoid problems such as those referred to in this article and to ensure that they can be implemented.

Email: constructionlaw@haleys-ltd.com: Website: www.haleys-ltd.com


Bespoke Construction Training Sharing of Knowledge and Improving Performance Haleys are mindful that training is a huge commitment on behalf of the Employer and the Employee with both wishing to see a benefit gained and in the case of the Employer a return for the commitment to cost and time. For this reason Haleys only provides in-house training in formats that are flexible in their timing and duration and which are usually adapted to meet the needs of our clients. This approach maximises the return of the Employer and Employee and is generally less expensive than enrolling on a public course. The training seminars are usually of a half or full day duration as required. Standard Forms of Contract: A range of workshop style seminars designed to provide the delegates with an understanding of the contract machinery in order to reduce risk and improve performance. The JCT 2005 Suite of Contracts The NEC3 Suite of Contracts Bespoke Forms and less common forms Contract Management: A range of seminars focussed on particular issues which commonly occur. Extensions of Time Loss and Expense Damages for Late completion Payment Obligations Variations Warranties and Bonds Procurement Strategies Project and Commercial Management: Workshop style seminars designed to provide essential commercial and contractual knowledge for Project Managers and non-commercial staff. Commercial Awareness Training for Supervisors and Site Managers Administrative Training for Supervisors and Site Managers Project Control Procedures and Risk Management for Project Managers

constructionlaw@haleys-ltd.com Email: constructionlaw@haleys-ltd.com: Website: www.haleys-ltd.com

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t i c er E l L C a & l n g r t e t E n s M d i n s o l o n e o l P o c e C i t M ti d v t n a & o r s e r D t e A e 3 i m r S Po D M b e Ar anag ation g P ices 3 n o i c t c v n s r i a i r M n e e c n e n l i c i io u S a m t d a i l r a u m c i m j c r T a i o d m e d e R o T C A s u m c j u e d & m l Co & Te In-Ho esign ility ution IT o l b i D t o a n s u IT on n g E l e i i n o a s & o R t s i e s e n t e M u t D g u g R i l u S n s s o i s p g e e s y & n is rvic e m e D i i t R v D y a r l n e s e u e v C r g S S m s m i a u e y g a w n S t l g e n i a n i i t a y o t v d n n i M i l t e a a t i a y u n u R c g M g a i t a Q B r t u r c i y e t a E Q g n L n r r t o E & e g C M es t En t Con ellin ion l s e o t t c s d d i P o o o ra men v t r P i & M M e b S r e e & D D r g A A n e 3 3 P a r o n i P t a a s s c e g n n M e i c n o o l c i n i i i i t t v l u n ia a r i a c i c e a m r erv udica i r c S e r d m T l e u o i m j j e m Ra m Ad Ad Com Telec Hous c e o l C e n T & y g n i t I n i s l T n o & i e I i o I t b i D T t u a n I l u n o E l n o i i n t o g a & i t o s u n i s s l e t g e M u o i u R s l s S D e e o e M g t s R & D n es u e i t p s s y R g s n e e i n m s e c i i v i D r to furthereinformation y m m on any of the articles v t i e contained within ulike r n a ClaIf youywould v e S g l e s r this Newsletter please contact us atS either; a u C w m t n g S i e e a t i n g i 8820, or on y v on 0845il367 a M Nottingham t an d e i n w t u y i R a e n t i u Purley on 020 8645 9707 g Q t a a v M c B u g er e a i y n t r Q R i g E r t nt L g E e c o n a i n & l g C r l t E n t n e M i n s l d LondonaMilton io Keynest NottinghamesPurley Co l o Birmingham t o e P t d r t Email M enquiries@haleys-ltd.com Website www.haleys-ltd.com c t a o n s i i r & e t v b i e Po D M b 3D r Ar agem n Ser & A 3 s n e Newsletter Juneo2010 n e r a i a n t P ic s n ica lM atio ice al M tio

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