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. These clauses allow a contractor to avoid liability for paying sub-contractors in respect of the work they carry out unless and until the contractor has itself been paid for those works by the employer. (Such clauses can be extremely onerous to sub-contractors and their legitimate use is therefore restricted by statute to situations where the employer has become insolvent.)
The relevant clause in the sub-contract under scrutiny was one which defined what “insolvency events” would allow the contractor to withhold payment. Unfortunately for the contractor, the sub-contract clause had been drafted prior to the introduction of out of court “self-certification” administrations by the Enterprise Act 2002, which was the actual insolvency event that had occurred. As a result, the court held that the clause should be interpreted literally and because it did not include “self-certified” administrations the contractor was not entitled to rely on the clause and could not withhold money. As well as its significance from an insolvency point of view, the case serves as a stark reminder that just because a particular draft of a clause has worked in the past, does not mean it will work indefinitely. Standard form contracts and clauses should be kept under frequent review to ensure they remain effective.