William Hare Ltd v Shepherd Construction Ltd

The Court of Appeal dismissed the appeal and upheld the Technology and Construction Court's decision that Shepherd Construction Limited could not rely on a "pay when paid" clause to withhold payment to subcontractors where the clause, as drafted, defined insolvency by reference to a court order. The court analysed the statutory history of section 113 of the Housing Grants (Construction and Regeneration) Act 1996 and the amendment effected by the Enterprise Act 2002 and the 2003 Order which introduced Schedule B1 (self‑certifying administrations).

The court held that the subcontract clause (clause 32) used wording corresponding to the pre‑amendment statutory definition (requiring a court order) and, although the drafting was mistaken in the light of the later statutory regime, the clause worked as written. The judges declined to rewrite or construe the clause as if it incorporated the later amendment. The decision emphasised that clauses which relieve a party from liability must be expressed in clear words and that a party who drafts such an exclusionary provision cannot expect the court to rescue a mistaken drafting by extending its scope absent evidence or clear language.

Background and parties: Shepherd Construction Limited was main contractor to the employer Trinity Wakefield Limited. Subcontractors William Hare Limited and C R Reynolds (Construction) Limited claimed payments owing under subcontracts. Shepherd refused payment of substantial sums (in Hare's case £996,683.35) asserting a "pay when paid" subcontract clause (clause 32) which purported to relieve it of payment obligations where the employer was insolvent as defined in clause 32.2.

Statutory and factual context: Section 113 of the Housing Grants (Construction and Regeneration) Act 1996 had originally defined insolvency in terms including the making of an administration order under Part II of the Insolvency Act 1986. The Enterprise Act 2002 and the Enterprise Act 2002 (Insolvency) Order 2003 substituted a new scheme (Schedule B1) allowing administration by court order or by self‑certifying routes. Shepherd used an older form clause drafted before the amendment which still required a court order to establish administration. Trinity entered administration by a self‑certifying route and Shepherd sought to rely on clause 32 to avoid payment.

Procedural history: The case came to this Court on appeal from Coulson J in the Technology and Construction Court ([2009] EWCH 1603 (TCC)). Coulson J had held for the subcontractors that Shepherd could not rely on the clause; the appeal to the Court of Appeal followed.

Relief sought and issues: The subcontractors sought payment withheld by Shepherd. The central issues were (i) whether the subcontract's definition of "insolvent" covered administrations effected by the Schedule B1 self‑certifying procedures introduced by the Enterprise Act 2002 and (ii) whether the court should construe the clause as if it had been drafted to reflect the amended statutory regime, or otherwise depart from the clause's natural wording in reliance on general principles of contractual interpretation.

Court's reasoning: The court reviewed the statutory history and the form of clause 32, noting that the clause mirrored the pre‑amendment statutory wording which required a court order. The appellant accepted there had been a drafting mistake but did not seek rectification and relied instead on interpretive principles from Investors Compensation Scheme v West Bromwich Building Society and subsequent authorities (including Chartbrook) which allow the background to show that something has gone wrong with language. The court accepted those principles in principle but concluded they did not justify rewriting an exclusionary clause drafted to relieve Shepherd of liability. The judges emphasised the established rule that provisions which exclude or limit liability must be expressed in clear terms and that unclear or ambiguous wording is construed against the party relying on it. In the absence of evidence of a common intention or a convincing necessity to alter the words, the clause was applied as written and did not catch self‑certifying administrations under Schedule B1.

Subsidiary findings and wider context: The court noted the practical prevalence of self‑certifying administrations but held that factual prevalence did not change the need for clear drafting. The court also observed that there was no evidence to justify rectification or mutual mistake relief. The decision made clear that parties who draft exclusionary clauses bear the risk of imperfect drafting.

Appeal dismissed. The Court of Appeal agreed with the TCC that clause 32, as drafted, required a court order to establish insolvency and therefore did not cover self‑certifying administrations under Schedule B1; the court declined to construe or rewrite the clause to incorporate the later statutory amendment, emphasising the need for clear language where a party seeks to exclude or limit liability.

Appeal from Coulson J in the Technology and Construction Court, [2009] EWCH 1603 (TCC), to the Court of Appeal, [2010] EWCA Civ 283 (Case Nos A1/2009/1526 and 1962).