| Date | 5 September 1996 |
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| Judgment | Churchfield Construction (Essex) Ltd -v- Waymans (Coppingford) Ltd. 25 July 1996, Unreported |
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| The Issue | The operation of subcontract pay when paid provisions after practical completion of the main contract. |
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| Implication |
Evidence of the judiciary's distaste for pay when paid clauses, which require careful commercial consideration by main contractors. |
printA surprising decision has been handed down in the Official Referee's court in the, as yet, unreported case of Churchfield Construction -v- Waymans decided on 25 July 1996, concerning pay when paid clauses. The primary platform for justification of pay when paid clauses by main contractors has always been the insolvency of employers. When an employer falls insolvent leaving sums unpaid to a main or management contractor, the pay when paid provisions are relied upon to pass this burden down the line to subcontractors. The pay when paid provisions in effect become 'pay if paid'. As a matter of commercial policy, pay when paid clauses are thus justified on the grounds that they apportion the risk of non-payment by the employer between those that have earned the right to be paid. It is argued that it is unfair that the main contractor should be the guarantor of the employer. If the use of pay when paid provisions had been limited to such circumstances, it is doubtful that much argument would have occurred. However these clauses have been applied in their widest sense regardless of the reasons why the payment has not been received by the main contractor, and it is this practice which has led to abuse. It is for this reason that the drafters of the new 'Construction Act' have effectively called the main contractors' bluff. Yes, they have said, you can still have your pay when paid clauses, but they will now only be effective where the third party payer (the employer) is insolvent. Returning to Churchfield Construction, their contract under the JCT Intermediate Form had led to a payment dispute with their client over payment following completion of the works. Evidence was led which showed that although this dispute concerned a number of different aspects of their account, it also included in part the work of their decorating subcontractor Waymans. Accordingly Churchfield had withheld payment to Waymans until the matter was resolved, relying on a subcontract term to the effect of: "an agreed payment shall be made to the subcontractor 28 days after the incorporation of the value of the subcontractor's work into an interim certificate provided that the main contractor has received payment for the said works." This is a standard pay when paid provision but the subcontractors were having none of it. Accordingly they applied for and were successful in obtaining a judgment against the main contractor under the summary procedure of Order 14 of the Rules of the Supreme Court. The present proceedings were by way of an appeal in the Official Referee's court against that judgment. The managing quantity surveyor for the subcontractor had sworn an affidavit setting out that a certificate of practical completion had been issued in respect of the main contract works. This struck a resonance with Mr Justice Garland who pointed out that he was familiar with pay when paid clauses and thought that they caused a lot of trouble. He held that once the certificate of practical completion had been issued, the pay when paid clause could no longer bite because it referred specifically to interim certificates. His view was that it was not meant to apply after the date of the practical completion certificate, since what was really being awaited at that stage was the final certificate which, from his construction of the subcontract clause, was expressly excluded. This was indeed a bizarre hook on which to hang this decision. It will jar with everyone concerned with the construction industry who is familiar with trade custom. After practical completion, there is usually a considerable reconciling of further payments due to the main contractor, of negotiations on the measured works and variation accounts and settlement of any loss and expense sums claimed by the contractor. Further payments will inevitably become due in the months which follow practical completion and these must be treated as interim certificates. To suggest otherwise is to pretend that upon the issue of a practical completion certificate the contractor can expect no further payment whatsoever unless and until the final certificate is issued, itself contingent upon other factors. There is simply nothing contained within the provisions for the issue of a practical completion certificate under these forms of contract which impact upon payment provisions in the manner suggested, nor anything in the payment provisions which would suggest that interim payments are somehow brought to an end upon the issue of a practical completion certificate. Furthermore, one consequence of the Crown Estates -v- Mowlem case, has been a considerable reluctance upon architects and engineers to issue final certificates. It has become common practice that the final payment after conclusion of the defects liability period, including final releases of retention, is made by way of a certificate for payment which is not described as a final certificate. Call it a penultimate certificate if you like, but it surely remains in reality an interim certificate. Surprisingly there is a distinct lack of judicial authority on pay when paid clauses. They are of course routinely considered by arbitrators and it is a fact that an arbitrator is unlikely to deny the effect of a pay when paid provision that is clearly and unambiguously worded. Given the nature of all this uncertain guidance, it may indeed be a good thing that arguments purely based on pay when paid provisions will soon, perhaps, become a thing of the past.
CJ-9629
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