And it only has to happen to you once to colour your whole approach to customers. "So you want to buy something, do you?" "Yes," says the prospective payer. "And I suppose you want credit?" "Oh, yes." "In that case, let's see the colour of your credit worthiness."
In practice, the dialogue is not quite like that. It is either non-existent, or the credit-giver dances around the topic. Brican Fabrications seemed to be a bit nervous when approached by Circle Construction. Circle wanted a price for some steel fabrication for a Glasgow job. Brican and Circle hadn't done business before; Brican was cautious. But at this stage, the ordinary course is to give a price. Then, if the potential customer shows interest, things get more focused. Circle was interested in doing business. In fact, it was pretty desperate to find someone of Brican's calibre; hitherto it hadn't found anyone. What's more, it had fibbed to its client, Merchant City Developments, by concealing the fact that it was having no luck finding a key supplier.
When it came to Circle placing an order, Brican was a tad non-committal. Circle's credit rating, once inquired into, was not quite tickety-boo. Funny what happened next. Brican didn't want the order but nor did it wish to embarrass Circle by an outright refusal. There is often a sort of timidness about checking the customer's credit rating and then telling the poor chap that he isn't up to snuff. Recognise that?
Anyway, Brican had what it thought was a bit of luck. Merchant phoned up Brican to check that it wasn't being lied to. Brican was asked if it was or was not willing to contract with Circle. Brican said it wasn't. Circle's credit rating wasn't good enough.
To find that the customer hasn’t got the money to pay up, that takes the biscuit. Bad debtors don’t just hurt in the pocket, they make blood boil
By now Merchant was perplexed. If this key steelwork wasn't ordered soon, the job would become horribly late. Unusually, the prospective subbie and developer decided to meet without the main contractor to see what could be done. "Easy," said Brican, "pay us direct." And so it was. And so the steel got done. And so it was that Circle went bust. And so it was that about £40k was still to be paid. And so it was that Merchant City Developments said it wouldn't pay that balance. And, you know, I have seen all this umpteen times before.
When I read the judgment handed down at the trial between Brican Fabrications and Merchant City Developments, I guessed what the defence would be. It would be that the written agreement to bypass the main contractor and pay the subbie direct was only meant to mean Merchant would pay Brican by deducting that money from money due to Circle. And since Circle went bust, Merchant owed nothing to Circle, so no money was available to deduct from and pay over to the subbie. Heard that story before?
The first judge dismissed all that. He said there was a direct pay deal, so fork out the £40k. The next higher judge reversed that decision. He said the sophisticated main contract and subcontract overtook the written agreement to pay direct. Then the three judges in the Court of Appeal reversed it all again. They made a heartening remark: "These [people] were not lawyers negotiating elaborate and detailed contractual terms but businessmen seeking to reach a mutually acceptable bargain." This court saw the commercial reality of the deal. They read it through businessmen's minds – contractors' minds – and said it was plainly meant that Merchant would pay the subbie direct, come what may.
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or email him on email@example.com.