William Hare Ltd v Shepherd Construction Ltd

Section 113 of the Housing Grants (Construction and Regeneration) Act 1996 invalidates pay-when-paid clauses unless the employer is insolvent in a specified statutory sense. A contractual clause referring to the making of an administration order cannot be expanded to cover later statutory forms of administration merely because those forms are more common. General principles permitting correction of contractual language in exceptional cases do not rescue a party that drafted an operative clause to exclude its existing liability. Clear words are required to exclude or limit liability, and ambiguity is resolved against the party seeking protection. The appeal was dismissed.

Shepherd Construction Limited was the main contractor for Trinity Wakefield Limited. William Hare Limited and C R Reynolds (Construction) Limited were subcontractors. After Trinity entered administration through a self-certifying route, Shepherd withheld payments otherwise due, relying on clause 32 of the subcontracts.

Coulson J, in the Technology and Construction Court, held in favour of Hare and accepted that the decision covered Reynolds. The court below held that the clause referred only to a court-made administration order and did not cover self-certifying administration. Shepherd appealed from that decision, contending that the statutory changes and commercial context justified construing the clause as if its wording had been amended. The central issue was whether the court could correct or expand the contractual language in that way.

The appeal was unanimously dismissed. Waller LJ gave the reasons, with which Rix LJ and Sir Scott Baker agreed.

1. Section 113(1) of the Housing Grants (Construction and Regeneration) Act 1996 outlawed pay-when-paid clauses unless the third-party employer was insolvent. Section 113(2) identified the statutory events constituting insolvency. The Enterprise Act 2002 and the Enterprise Act 2002 (Insolvency) Order 2003 altered section 113(2)(a) so that entry into administration under Schedule B1 to the Insolvency Act 1986 included both court-ordered and self-certifying administration.
2. Clause 32.2.1 retained the earlier wording, referring to the making of an administration order under Part II of the Insolvency Act 1986. On its ordinary meaning, that required a court order. Trinity’s self-certifying administration did not satisfy the clause, and the other contractual insolvency events were not engaged. The clause nevertheless had a coherent, though narrow, meaning.
3. Shepherd relied on the construction principles discussed in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Chartbrook Limited and Another v Persimmon Homes Limited and Another [2009] 1 AC 1101. Those authorities recognised that, in a strong and exceptional case, background circumstances may show that the parties used the wrong words. Waller LJ was doubtful that those principles could assist a party seeking to rely on a clause drafted solely for its own protection.
4. There was no evidential basis for mutual mistake or rectification. The clause was drafted by Shepherd, relieved it of an existing liability, and was not truly a sharing of insolvency risk. The prevalence of self-certifying administrations did not justify altering wording that worked according to its terms.
5. The dominant principle was that a party seeking to exclude or limit liability must use clear words. As reiterated in Dairy Containers Ltd v Tasman Orient Line CV [2005] 1 WLR 215, ambiguity or lack of clarity is resolved against that party. Shepherd could not invoke general construction principles to rescue its misdrafted exclusion clause. Coulson J’s decision therefore stood.

• Court of Appeal (Civil Division): In William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283, Shepherd’s appeal was dismissed unanimously.
• Queen’s Bench Division, Technology and Construction Court: Coulson J gave judgment in favour of William Hare Limited in [2009] EWCH 1603 (TCC). The decision was accepted as covering the similar dispute involving C R Reynolds (Construction) Limited.