William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC)

Shepherd engaged Hare to fabricate and erect steelwork for a new retail development. Hare’s sub-contract contained a “pay when paid” clause, clause 32, drafted in similar language to s113 of the HGCRA. Accordingly, it included four alternate circumstances where the employer would be considered insolvent, making speci c reference to the Insolvency Act 1986:  

  1. on the making of an administration order against it;
  2. on the appointment of an administrative receiver or a receiver or manager of its property;  
  3. on the passing of a resolution for the voluntary winding up without a declaration of solvency; or  
  4. on the making of a winding-up order.  

If the employer became insolvent in those circumstances then Shepherd would be entitled to withhold payment from Hare, until or unless Shepherd itself was paid. Hare issued two applications for payment for just under £1million. In response, Shepherd issued withholding notices under clause 32. Hare said that the withholding notices were invalid. The di! culty here was that the employer had become insolvent by a route not expressly identi ed in clause 32, namely self-certifying administration. This route to insolvency was introduced by amendments to the Insolvency Act 1986, which were brought in in 2003,  ve years before the sub-contract was entered into. Hare said that this meant that the withholding notices were not valid. Shepherd submitted that it would be absurd to interpret clause 32 so narrowly, and that any amendments to the Insolvency Act 1986 should also come under the scope of clause 32. Hare noted that whilst clause 32 made reference to the “… Insolvency Act 1986 …”, this was to be contrasted with clause 29.3 of the sub-contract which provided for the insolvency of Hare. This clause referred to “… the Insolvency Act 1986 or any amendment or re-enactment thereof …”, words missing from clause 32. Mr Justice Coulson held that Hare’s submission was correct, for three reasons:  

  1. that the plain meaning of the words in clause 32 produced a cogent and clear result. The four routes to administration identified in clause 32 were still possible routes. They had not been made redundant by the amendments to the Insolvency Act 1986, and the clause still operated;
  2. that clause 32, a pay when paid clause, amounted to a form of exclusion clause:  

“… the court is required to ensure that Shepherd are kept to the four corners of their bargain with Hare and that a clause of this nature is not rewritten to expand the circumstances in which Hare might  nd themselves (through no fault of their own) signi cantly out of pocket because of a  nancial failure up the contractual chain.”  

  1. that the sub-contract was entered into  ve years after the amendments to the Insolvency Act 1986 were brought in. Both parties will have been deemed, at the least, to have known about the amendments to the Insolvency Act 1986.  

The Judge thought that in such circumstances it should be seen as a deliberate decision on the part of Shepherd not to amend clause 32 to that e" ect. If the contract had been entered into before the amendments, then the result may have been di" erent. Alternatively, the Judge went on to say that if he was wrong on the above, he would still  nd against Shepherd using the contra proferentem rule. As Shepherd had put forward the clause in the contract issued to Hare, and there was doubt as to its meaning, the Judge should interpret such an ambiguity against them.