The death of pay when certified?

In Durabella v J Jarvis & Sons the court decided that ‘pay when paid’ clauses must comply with a number of conditions before a contractor can rely on them. It follows that ‘pay when certified’ clauses must follow the same rules.

The defendant, Jarvis, was the main contractor for a project in Limehouse. This project was for the construction of 36 flats: Durabella was taken on as subcontractor to provide the hardwood flooring. The employer, Galliard Homes, was not satisfied with the progress of the works – largely because of Jarvis’ lateness and chaotic programming – and terminated the contract. Jarvis brought proceedings against Galliard for the works that had been carried out. Galliard and Jarvis reached settlement, but this settlement included ‘no value … for works undertaken … by Durabella Ltd.’ Jarvis had a ‘pay when paid’ clause in its contract with Durabella, and relied on this clause to deny payment to the subcontractor.

Now ‘pay when paid’ clauses are automatically void, because of the Housing Grants, Construction and Regeneration Act 1996. The contract between Jarvis and Durabella, however, had been made on 9 January 1996 – several months before the act came into force. The judge, however, explained that a ‘pay when paid’ clause is not automatically valid either.

The court held that a ‘pay when paid’ clause was not of itself unreasonable, and so would not be void under the Unfair Contract Terms Act (UCTA), but there were two important limitations on the protection it would give a contractor.

Firstly, the contractor could not rely on the clause if the reason for non-payment was due to its own breach of contract: this would make it an unfair contract term under UCTA.

Thus ‘pay when certified’ clauses that some contractors have put in place may also be made void

Jarvis’ case fell down on this point: they could not rely on Galliard’s non-payment to avoid paying Durabella, since Jarvis’ difficulties with Galliard resulted from their own disorganisation.

Secondly, the contractor must, if it wants to rely on the clause, undertake ‘that it will pursue all means available to obtain payment’. This term must be implied for the clause to be effective. Here again Jarvis’ case failed: they could not demonstrate that they had tried hard enough to get paid for Durabella’s work. In fact, they seem to have written it off, as the words of the settlement show, for the sake of getting a better deal for themselves.

Thus, the ‘pay when certified’ clauses that some contractors have put in place may also be made void. If they are to be effective, contractors must conform to the same rules laid down for ‘pay when paid’ clauses. They cannot use them if they are in breach of contract with the employer. Further they have to take on the obligation to do everything within their power to get certification for the subcontractor’s work. The second of these, in particular, is a clear obligation.

Case: Durabella Ltd v J Jarvis & Sons Ltd [2001] All ER (D) 102 (Sep)