The spectre of insolvency continues to loom large in the construction industry. A recent judgment of the Court of Appeal provides a reminder that the post-insolvency provisions of the JCT Contracts apply even where the contract is terminated prior to insolvency.
The parties entered into two contracts in the form of the JCT Intermediate form of Building Contract, 2011 edition for the development of student accommodation. Each contained the usual JCT provisions for monthly interim payments to the contractor and the standard JCT termination procedures which provide that, on the occurrence of a defined insolvency event, the employer is not be required to make any further payment of sums due or which may become due to the contractor “whether or not notice of termination has been given”.
By August 2013 disputes had started to emerge regarding delays, defects and the proper value of the works. The employer failed to make payment of sums certified for payment under each contract for the August and September 2013 payment cycles but did not give any pay less notices. Subsequently in January 2014 the Contracts were terminated. The contractor was solvent at that point but entered into voluntary liquidation in July 2014. A total of £902,506 remained unpaid.
A key issue before the Court of Appeal was this: is the employer obliged to pay sums that have already become due if the contractor becomes insolvent after the last date on which a Pay Less Notice could have been given has passed? The first instance judge answered in the negative and found that the employer could only rely on the post-insolvency provisions in order to avoid making any further payment if the contract was still “on foot” when the contractor became insolvent. The Court of Appeal found this conclusion to be wrong for the following reasons:
- If the contractor is or becomes insolvent, the employer may rely on the post- insolvency provisions even where the contract is terminated on other grounds.
- The provisions dealing with insolvency have a wider ambit than simply conferring a right of termination on the employer and imposing an obligation on the contractor immediately to notify the employer of its impending insolvency.
- The policy of permitting the employer to withhold any further payment following insolvency was based upon: (1) freedom of contract; (2) the nature of the provisional obligation to make payment; and (3) the alteration of the rights between the parties by reason of the rules of insolvency set-off.
- The fact an employer does not have to make an interim (i.e. instalment) payment does not mean that the employer is discharged from all liability to make such payments; only that the Employer does not have to make payment or give credit for the relevant amount until the notional final account is taken.
The judgment will be welcomed by parties at all levels of the supply chain who, having suffered delays and losses due to insolvency may be distracted by threats and claims which may be premature or unjustified. Whilst the obligation to pay a certified sum may not be extinguished on insolvency, any payments will fall to be made in accordance with the post-termination provisions in the contract. If there is more than one contract between the parties, any payment(s) may then be subject to the application of the Insolvency Rules such that only a net balance may be due for payment, once the actual costs of completion and losses that have been suffered as a result of the insolvency have been taken into account.
Wilson and Sharp Investments v Harbour View Developments Limited  EWCA Civ. 1030