The sudden insolvency of a main contractor is always bad news. And if the contractual relationships are not clear it can be even worse, as this case shows

One of the worst things that can happen on a project is the insolvency of the main contractor. The developer is likely to suffer delay and additional expense in completing the works, and the subcontractors, too, may find themselves out of pocket. Both can end up joining the ranks of unsecured creditors picking over the company’s remains.

However, if the developer has agreed to make direct payments to subcontractors it may find itself on the receiving end of claims for unpaid fees. Developers that wish to avoid entering into direct contractual relationships with subcontractors should take note of the case of Sydenhams (Timber Engineering) Limited vs CHG Holdings.

CHG, the developer, appointed Rybarn contractor for a hotel development in Bournemouth. Rybarn subsequently went into administration. A dispute arose and Sydenhams, a timber firm, claimed £136,864 from CHG for windows and retention money. CHG countered by saying there was no direct contract between it and Sydenhams, and that it had paid Rybarn for the works.

Before CHG appointed Rybarn it contacted Sydenhams to obtain quotes for the timber frame, windows and internal joinery work. Sydenhams quoted for the work and produced a number of order manufacture forms that CHG signed and returned. This was CHG’s first mistake. CHG claimed that it was always clear during discussions that Sydenhams would be appointed as a subcontractor, but it was unable to provide documentary evidence to support this.

In May 2003, Sydenhams became aware of Rybarn’s involvement as main contractor. During a meeting at that time, the issue of paying Sydenhams through Rybarn for tax reasons was discussed. It is worth noting that Sydenhams was at this early stage already concerned about Rybarn’s financial strength.

It is also worth noting that the ensuing dispute could have been avoided if the intended contractual relationship between the three parties had been clearly documented before matters progressed. This did not happen and CHG went on to enter into the main contract with Rybarn. That included works to be carried out by Sydenhams, but there was no evidence to suggest that Sydenhams had agreed to them.

On 18 December 2003 CHG, Rybarn and Sydenhams agreed that Sydenhams would be paid through Rybarn. This was documented in a letter signed by all three parties, which CHG later claimed was evidence of a subcontract. Of course, a sentence in the letter expressing that this was the intention would have assisted CHG’s claim.

The case of Sydenhams vs CHG is an object lesson in how not to appoint a subcontractor. It also underlines the need for
contemporaneous records

Rybarn delayed a number of payments, which led Sydenhams to suspend work in March 2004. An agreement was reached in April 2004 that outstanding and future payments would be made directly by CHG, and Sydenhams completed its works.

CHG continued to make payments to Sydenhams even after Rybarn went into administration in November 2004. This did little to assist CHG’s argument that it had no contractual relationship with Sydenhams.

The judge had to decide whether CHG was liable to Sydenhams. He held that one of the order for manufacture forms constituted a binding contract between CHG and Sydenhams. It was marked as being the “final revision”, contained all of the key information required to form a binding contract and instructed Sydenhams to proceed.

The December letter signed by all three parties was not a subcontract as CHG had claimed. Instead it was deemed to be a variation of the contract dealing solely with the mechanics of payment.

CHG was ordered to pay Sydenhams £128,000 with interest (minus £35,000 for a cross claim for defects).

This case is an object lesson in how not to appoint a subcontractor. It also emphasises the importance of checking the financial strength of the parties and making clear written representations as to the intended contractual relationships before works start. The contemporaneous written evidence of one party is always likely to be given more weight than the memory of the other.

Developers should also be aware of the potential danger of paying the wrong party. It soon became clear in this case that CHG had not paid Rybarn the money that Sydenhams was claiming, but if it had done so, it is unlikely that this would have changed the outcome of the case. Where a direct payment agreement is entered into with a specialist, the developer should ensure that it complies with it. Nobody likes to pay twice for the same work.