This is a story about a busted developer and a contract that contained a pay-when-paid clause. The lessons that emerge from it are harsh, but it’s a good idea to learn them

The £210m Trinity Walk development in Wakefield promised to be, and might yet be, a vibrant, stimulating retail and leisure environment for the local community. Trinity Walk coaxed Anglo Irish Bank to fund the scheme, Shepherd Construction bagged the main contract, and William Hare won the steelwork subcontract from Shepherd. The work started in 2008. Debenhams, Next, River Island, New Look and Sainsbury’s were lined up as tenants.

All of that happened before the banking world got found out. On 11 March, Shepherd said: “Anglo Irish Bank today declared it will no longer be supporting the funding of the Trinity Walk project.” So 185 building blokes went home and Trinity went into administration still owing a lump of money to Shepherd, which still owed a lump of money to its subcontractors. William Hare was owed just under £1m. Won’t pay, said Shepherd: our contract contains a “pay-when-paid” clause. And so they went to court.

If you’ve been around UK construction for some years you might mutter: “Pay-when-paid was outlawed on 1 May 1998 by the Construction Act.” That’s sort of right. Let’s go back to late 1988 and Olympia & York’s Isle of Dogs development. It has turned out to be a fabulous scheme, but in 1992 the developer went into administration in a similar way to Trinity. This project was a disaster for many a subcontractor because they had agreed to pay-when-paid clauses, so the main contractor did not have to stump up. It was embarrassing. So much so that in 1998, pay-when-paid was “outlawed”.

But the legislation has ifs and buts. This kind of clause is ineffective unless the folk who owe the money to the main contractor become insolvent by one of four routes. When the William Hare case came to court, the judge identified “the circumstances in which the subcontractor can do a considerable amount of work for the main contractor under the subcontract, and then not be paid a penny for the work”. The provision, he continued, “attempts to pass on to William Hare, which does not have a contract with Trinity or any obvious means of recovery against Trinity, the risk that Shepherd (which does have a contract with Trinity and has presumably done the necessary financial checks and ensured proper warranties are in place) may not be paid under its main contract for the subcontract works. It is a form of exclusion clause.”

Credit: Simone Lia

This is important. It’s all about shifting risk down the chain. Shepherd does not want to bear the risk of having to shell out cash to subcontractors if it can’t get paid by its employer.

So, Trinity, having gone into administration, seems to fit into one of the four exceptions, which suggests Hare was contractually happy to let Shepherd off having to pay the odd million pounds. Ah, well now, Hare went off to its lawyers. Its lawyers discerned a glitch in Shepherd’s position, and the court agreed. Shepherd’s downfall was that its in-house subcontract document was a tad out of date. True, Trinity went into administration by reason of insolvency and true, the four exceptions allow administration to be a “good” reason to escape from paying the subcontractor. The big “but” is that Trinity used a type of administration route that was not covered by the wording in Shepherd’s in-house subcontract. Oh, dear. Shepherd can not rely on the pay-when-paid rule. It has to pay. The buck is stuck in Shepherd’s camp.

Now let’s get real about all this. This business of commercial building is ever so good at making companies go bust. T’was ever thus. No other industry goes broke better. Nobody ought be surprised when a developer, main contractor or subcontractor fails. There are several ideas floating about to overcome this. First is the project bank accounts. The industry thinks that idea is great, but the banks don’t like it. Tell the banks to go to hell. Next, you subcontractors get all you deserve if you agree to pay-when-paid clauses. Just tell main contractors to go to hell. Next, you main contractors use pay-when-paid despite it being unlawful. If you get a thick ear because of that, tough.