| Date | 21 November 2001 |
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| Judgment | Aqua Design and Play International Limited and Fenlock Hansen Limited v Kier Regional Limited TCC 22 October 2001 |
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| The Issue | The operation of pay when paid under the DOM/1 form of subcontract. |
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| Implication |
In the published form of DOM/1, a pay when paid mechanism is not included, despite that the Construction Act will allow such provisions in the event of the insolvency of the Employer. |
printDespite the statutory regulation of 'pay when paid' clauses, these provisions continue to be controversial. In the light of the significant efforts made to bring about a culture of partnering and supply chain collaboration in the construction industry, many commentators say that 'pay when paid' provisions offend principles of trust and fair dealing. It is no surprise that the Construction Act introduced a measure of regulation to the practice. Main contractors found it difficult to justify the abusive practices of many in their midst. Pay when paid had become recognised as 'pay if paid'. More difficult to defend was the operation of such clauses in circumstances where the main contractor could not show that the performance of the subcontractor contributed in any way to the payment difficulties between the main contactor and its client. In these circumstances, any dispute up the line was often used as a pretext for blocking payment to subcontractors. Main contractors have argued in their defence that such clauses validly protect their interests in the event of the employer's insolvency. Here, they argue, the financial effects of insolvency are shared between all those who have earned the right to be paid. To the dismay of all those who represented the interests of subcontractors, the government accepted this argument. The result is the requirement enshrined within the Act that pay when paid is outlawed except in circumstances where the employer has become insolvent. No surprise then that some main contractors who had hitherto abandoned the practice, sought to reintroduce clauses to provide protection in the event of their client's insolvency. No need to search for a clause that would do the trick. Amendment 10 to the DOM/1 form of subcontract, published by the Construction Confederation to meet the requirements of the Construction Act, included a Clause 32 as follows: "Notwithstanding anything to the contrary elsewhere in this subcontract, if the employer is insolvent as defined by clauses 32.2, 32.3, and 32.4, the Contractor shall not be obliged to make any further payment to the subcontractor of any amount which is due or may become due to the subcontractor unless the Contractor has received payment in respect thereof from the Employer and only to the extent of such receipt". Despite that it would comply with the Act, in the opinion of the subcontracting fraternity it was unacceptable to provide such a clause in a standard subcontract form. In fact, clause 32 should never have seen the light of day. Agreement had been reached that clause 32 should be deleted. In July 1998, a series of corrections to DOM/1 were published which confirmed the deletion of clause 32 along with a footnote: "During the drafting of the revisions to the Domestic Subcontract DOM/1, clause 32 was drafted and was the subject of discussions with representatives of the National Specialist Contractors Council and Specialist Engineering Contractors Group. Although both subcontractors' representative bodies no longer approve DOM/1 in its present form, it was agreed that clause 32 should be deleted. Due however to a printing error, this did not take place and clause 32 should be deleted from the standard form". Confused? So too were Kier Regional and two of their subcontractors, Aqua Design and Fenlock Hansen, to the extent that they all ended up in the Technology and Construction Court looking for a ruling from His Honour Judge Richard Seymour QC. Kier were main contractors for the fitting out of a health and fitness centre at Chelmsford in Essex for a company called Heathland. Aqua was engaged as subcontractor for the supply and installation of a swimming pool, sauna, steam room, and showers. Fenlock was subcontractor for glazed screens. Both commenced proceedings against Kier who had refused payment relying on clause 32 when its client, Heathland, went into administration. The barrister acting for both Aqua and Fenlock set out his case. When Kier had issued its subcontract to the parties, this had referred to the incorporation of the DOM/1 subcontract conditions as published. This could only mean the conditions as corrected by the Construction Confederation in July 1998. Accordingly, those conditions did not include clause 32, inserted by mistake in the DOM/1 form. Kier countered that whilst the subcontract conditions expressly incorporated a number of amendments to the printed form, these were not the corrections issued by the Construction Confederation and did not include the deletion of clause 32. Judge Seymour noted that the intentions of Kier, insofar as Aqua or Fenlock did not share them, were not relevant to the issue. What was incorporated into the subcontracts was the conditions as published by the Construction Confederation. That included the corrections as published at the date the subcontracts were made. It was not correct to say, as Kier had argued, that the corrections were merely suggested by the Construction Confederation. In consequence, Kier would not be allowed to rely upon the pay when paid provisions of clause 32, as these had never been effectively incorporated into the subcontracts.
CJ-0146
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