| Date | 21 January 2004 |
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| Judgment | Brican Fabrications Ltd v Merchant City Developments Ltd, Inner House Scottish Court of Session, 17 July 2003 |
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| The Issue | Whether a dispute or difference capable of reference to adjudication can exist where a course of dealing had been established by a party other than the contracting party. |
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| Implication |
In certain circumstances the courts will uphold an agreement between an employer and a subcontractor to make direct payments bypassing the main contractor. Where this follows the insolvency of the main contractor, the employer may find itself bound to make these payments twice. |
printArrangements which subcontractors might make to attempt to bypass the main contractor and secure direct payment from the employer are fraught with difficulty. In October 2001, in the case of Actionstrength v International Glass Engineering, the court held that an employer's agreement to pay a subcontractor direct in the event of default by the main contractor would normally be viewed as a guarantee. As such, unless the guarantee had been written down in a document and signed by the employer, it was unenforceable. In December 1995, similar issues concerning the JCT 80 form of contract were investigated in the case of B Mullen & Sons v John Ross and Malcolm London. In that case, the court held that it was bound by the decision of the House of Lords in the case of British Eagle v Air France. The effect was that an employer could not pay a subcontractor direct in the event of the insolvency of the main contractor and withhold corresponding monies from the main contractor, as to do so would be to create an unlawful preference in favour of the subcontractor which ran contrary to insolvency law. Were the employer to pay the subcontractor direct in such circumstances, he ran the very real risk of being forced to pay those monies a second time to the liquidators of the main contractor to allow them to make proper distribution of those funds to the remaining creditors. These issues were examined again last summer in the case of Brican Fabrications v Merchant City Developments. Merchant was the developer for a leisure complex to be built at Candleriggs, a street in the merchant city district of Glasgow which takes its name from the occupation once carried out there, the production of candles. Merchant had entered into a main contract with Circle Construction. Placing a subcontract for the steel fabrication works was critical to the progression of the works, but Circle was having considerable difficulty in finding a subcontractor willing and able to enter into a subcontract with them. Discussions had taken place with a subcontractor named Brican. Brican however had no intention to enter into a subcontract with Circle, since they were not satisfied with Circle's financial status. Merchant became dissatisfied with progress and contacted Brican to find out what was holding matters up. Brican explained that they were refusing to enter into a subcontract due to their concerns regarding the financial stability of Circle. A meeting was arranged between Merchant and Brican agreed to meet without Circle present. Merchant were in a very weak bargaining position. They had committed themselves to a main contract with Circle, which appeared to be in serious difficulties because of Circle's failure to secure a steelwork subcontractor. The implications for Merchant, in terms of delay and potential loss of rental income if these delays were not rapidly resolved, were serious. Brican on the other hand were in a strong bargaining position. They were prepared to undertake the steelwork only on the basis that Merchant would accept responsibility for payment direct to them for steelwork duly carried out. It was agreed that Merchant would pay directly to Brican their entitlement to money under any subcontract with Circle, if Brican were prepared to enter into the subcontract and if Circle were prepared to agree to the arrangement. This was accepted and confirmed in subsequent correspondence. Brican commenced work and were paid direct by Merchant on six occasions. Inevitably however, Brican's initial fears concerning the financial stability of Circle were proved justified. Soon after completion of the subcontract works a provisional liquidator was appointed to Circle and the company was wound up. Brican presented its draft final account to Merchant showing that a further £43,000 was owing to them. Merchant refused to pay and proceedings were commenced. Brican maintained that Merchant had undertaken that in the event of Brican entering into a subcontract with Circle to carry out the steelwork element of the development, Merchant would make payment direct to them for that work. Merchant on the other hand argued that the agreement had a quite different effect. Merchant claimed that it had agreed only to deduct from amounts due to Circle under the main contract any monies which became due under the subcontract and redirect those monies to Brican. In other words, the deal depended upon monies being due to Circle. Overturning the earlier decision of the Sheriff Principal, three law lords of the Inner House of the Scottish Court of Session held in favour of Brican. Whether the agreement was a tripartite agreement or a bilateral agreement between Merchant and Brican alone was immaterial. The rights of Brican to receive payment and the obligation of Merchant to make the payment for subcontract steelwork were not affected by the subsequent liquidation of Circle. Brican were entitled to be paid the balance owing to them. It was not argued in court whether such arrangements were contrary to insolvency law. That was a matter for Merchant to consider. Having undertaken to pay Brican direct, it might well discover that it remained under a duty to pay those monies once again to Circle under the terms of the main contract.
CJ-0403
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