Neutral Citation Number: [2009] EWHC 1603 (TCC)

Case No: HT-09-202






St. Dunstan’s House

133-137 Fetter Lane

London EC4A 1HD


Date: Thursday, 25 th June 2009





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MR. SEAN BRANNIGAN QC (instructed by Messrs. Addleshaw Goddard) for the Claimant, Hare

MR. ALEXANDER NISSEN QC (instructed by Messrs. Gosschalks) for the Claimant, Reynolds

MR. STEPHEN FURST QC and MS KIRSTA LEE (instructed by Messrs. Wragge & Co.) for the Defendant




  1. This claim under CPR Part 8 arises out of a type of contractual provision which has been a relatively rare sight in the construction industry for the last 15 years – the “pay when paid” clause. Such clauses were effectively outlawed by section 113(1) of the Housing Grants (Construction and Regeneration) Act 1996, unless it could be shown that the third party employer was insolvent. This provision, and the contract forms drafted to comply with it, have given rise to very few reported cases but now, as the UK construction industry faces severe economic difficulties, this part of the Act is back under the spotlight.

  2. The dispute in the present case is simply summarised. The claimant sub-contractor (whom I shall call “Hare”) was engaged in December 2008 by the defendant main contractor (whom I shall call “Shepherd”), to fabricate and erect steelwork at a large development at Trinity Walk in Wakefield. The employer was Trinity Walk Wakefield Limited (whom I shall call “Trinity”). There was an express term of the sub-contract, clause 32, which was in similar terms to section 113 of the 1996 Act and which defined the employer’s insolvency by reference to four alternate situations: an administration order made by the court; the appointment of an administrative receiver; insolvent liquidation; and the making of a winding-up order by the court.

  3. Hare have legitimate claims against Shepherd for £569,601.75 plus VAT (Valuation 5), and £427,081.60 plus VAT (Valuation 6). In respect of each valuation, however, Shepherd have issued a withholding notice relying on clause 32. The dispute which now arises stems from the fact that Trinity did not become insolvent by reference to any of the four events specifically identified in clause 32. Their administration was achieved through a different route and was made possible by the amendments to the Insolvency Act 1986 introduced by the Enterprise Act 2002. These amendments allow for what have been referred to as self-certifying administrations. Although the sub-contract was made many years after the amendments to the relevant legislation came into force, clause 32.2 made no reference to them.

  4. Accordingly, on behalf of Hare, Mr. Brannigan submits that, because none of the four insolvency events identified in clause 32.2 have occurred, Trinity is not insolvent within the meaning of the clause and the withholding notices are therefore invalid. In this he was supported by Mr. Nissen, who acts for CJ Reynolds, another sub-contractor on the same project, who is allegedly in the same position as Hare. On behalf of Shepherd, Mr. Furst maintained that it would be absurd for the sub-contract to be construed as ignoring the subsequent amendments to the legislation, and that all routes to administration under the Insolvency Act 1986, as amended, were covered by the words of clause 32.2.

  5. Before embarking on the detail of this Judgment, I should add a further word of explanation about the position of CJ Reynolds. At the outset of the hearing last week, following argument, I made it plain that this Judgment would be binding on Hare and Shepherd only, and that Reynolds’ own claim for declarations was not being decided. This was because Reynolds’ Part 8 claim was only issued shortly before the hearing, and neither Mr. Furst nor I have had sufficient time to absorb whether or not the factual circumstances surrounding the Reynolds’ sub-contract were the same or similar to those surrounding the Hare sub-contract. That said, I invited Mr. Nissen to make submissions on the point of construction so as to ensure that all the relevant arguments of principle had been addressed before I reached my conclusions.


  1. Section 113 of the Housing Grants (Construction and Regeneration) Act 1996 was in these terms:

(1)A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent.

(2) For the purposes of this section a company becomes insolvent —

(a) on the making of an administration order against it under Part II of the [1986 c. 45.] Insolvency Act 1986,

(b) on the appointment of an administrative receiver or a receiver or manager of its property under Chapter I of Part III of that Act, or the appointment of a receiver under Chapter II of that Part,

(c) on the passing of a resolution for voluntary winding-up without a declaration of solvency under section 89 of that Act, or

(d) on the making of a winding-up order under Part IV or V of that Act.”

  1. In summary, whilst this provision outlawed pay when paid clauses, which caused so much difficulty in the late 1980s/early 1990s, there was one clear exception: when the ultimate employer had become insolvent. Insolvency was defined by reference to what were the four principal ways in which a company might become insolvent including at (a) “the making of an administration order against it under Part II of the Insolvency Act 1986”.

  2. Part II of the Insolvency Act 1986 was entitled “Administration Orders”. Section 8 read as follows:

(1) Subject to this section, if the court –

(a) is satisfied that a company is or is likely to become unable to pay its debts (within the meaning given to that expression by section 123 of this Act), and

(b) considers that the making of an order under this section would be likely to achieve one or more of the purposes mentioned below,

the court may make an administration order in relation to the company.

(2) An administration order is an order directing that, during the period for which the order is in force, the affairs, business and property of the company shall be managed by a person (‘the administrator’) appointed for the purpose by the court.”

Sections 9 to 27 of Part II deal in detail with the effect of an administration order, the powers of administrators and the like. Part III of the Insolvency Act was concerned with receivership. Parts IV and V were concerned with winding-up orders.

  1. The process of administration under Part II was widely perceived as being rather cumbersome and potentially expensive because of the need, amongst other things, for an independent report. The Practice Note of 17th January 1994, issued by the Chancery Division, commented as follows:

“Administration Orders under Part II of the Insolvency Act 1986 are intended primarily to facilitate the rescue and rehabilitation of insolvent but potentially viable businesses. It is of the greatest importance that this aim should not be frustrated by expense and that the costs of obtaining an administration order should not operate as a disincentive or put the process out of the reach of smaller companies.

Rule 2.2 of the Insolvency Rules provides that an application for an administration order may be supported by a report by an independent person to the effect that the appointment of an administrator for the company is expedient. It is the experience of the court that the contents of the Rule 2.2 Report are sometimes unnecessarily elaborate and detailed. Because a report of this character is thought to be necessary, a preliminary investigation will often have been unduly protracted and extensive and, hence, expensive.”

It was this prevailing view that led to the significant amendments to Part II introduced by the Enterprise Act 2002.


  1. The explanatory notes to the Act gave details of how and why the changes had come about:

“640. Changes to the existing corporate insolvency regime focus on restricting the use of administrative receivership and streamlining administration. The White Paper 'Productivity and Enterprise: Insolvency - A Second Chance' recognised that the administration procedure introduced by the Insolvency Act 1986 was seen as an important tool in providing companies in financial difficulties with a breathing space in which to put a rescue plan to creditors. However, it also recognised that the procedure could be improved …  

641. The existing provisions contained in Part II of the Insolvency Act 1986 allow the court to make an administration order in respect of a company that is in financial difficulties. Broadly speaking, the effect of such an order is to afford the company protection from its creditors whilst attempts are made to save the company or achieve a better result for creditors than would be achieved in a winding-up. However, in practice, in many cases where a company gets into financial difficulties, this will lead to the appointment of an administrative receiver by those providing financial support for the company (typically the company's bank), since they usually will have taken a floating charge over all the company's assets. …

643.     The sections will alter the above provisions in the following way. First, the appointment of administrative receivers will be restricted to certain exceptions … and the Act seeks to provide that administrators will in future be appointed in situations that would have been dealt with through administrative receivership. Second, the procedure has been amended to streamline the process both in the provisions of the Act and the Rules made under section 411 Insolvency Act 1986 that seek to give effect to the provisions of the Act. … ”

  1. Section 248 of the 2002 Act was in these terms:

248.Replacement of Part II of Insolvency Act 1986

(1) The following shall be substituted for Part II of the Insolvency Act 1986 …

Part II


8 Administration

Schedule B1 to this Act (which makes provision about the administration of companies) shall have effect.

(2) The Schedule B1 set out in Schedule 16 to this Act shall be inserted after Schedule A1 to the Insolvency Act 1986.

(3) Schedule 17 (minor and consequential amendments relating to administration) shall have effect.

(4) The Secretary of State may by order amend an enactment in consequence of this section.

(5) An order under subsection (4) —

(a) must be made by statutory instrument, and

(b) shall be subject to annulment in pursuance of a resolution of either House of Parliament.

  1. Section 249 dealt with what were called “Special Administration Regimes” in relation to which the new section 248 was to have no effect. These included water and sewerage undertakers, protected railway companies, air traffic services, public private partnerships and building societies. Section 249(2) made plain that, in respect of these companies, the old regime under Part II, i.e. the making of an administration order, was to continue to have effect.

  2. Schedule B1 contained detailed provisions concerned with administration. It identified three different routes to administration: the appointment of an administrator by the court following the making of an administration order, dealt with at paragraphs 10 to 13 of Schedule B1; the appointment of an administrator by the holder of a floating charge, dealt with at paragraphs 14 to 21; and the appointment of an administrator by a company or directors dealt with at paragraphs 22 to 34 of Schedule B1. The first of these was the route available under the original Insolvency Act. The second and third were new and were conveniently labelled during the hearing as “self-certifying options”. They were the product of the new desire to streamline the administration process.

  3. Accordingly, it is no longer necessary to obtain a court order in order to appoint an administrator. This can now be done by the completion and filing at court of the requisite forms which contain declarations that the conditions for administration have been satisfied. But these options are not open to everyone. They are not available, for example, to a company in liquidation or a creditor who is not a qualifying floating charge holder. In addition, paragraph 33 of Schedule B1 makes it clear that, in the event that both court and self-certifying procedures are operating in parallel (because, say, there is a dispute about the identity of the appropriate administrator), the court order takes precedence over the other options. That aside, following the appointment of the administrator there is no significant difference in the substance of the administration.

  4. The Enterprise Act 2002 (Insolvency) Order 2003 (Statutory Instrument 2003/2096) made consequential changes to, amongst other things, section 113 of the Housing Grants (Construction and Regeneration) Act 1996. Section 113(2)(a) now reads:

“For the purposes of this section a company becomes insolvent —

(a) when it enters administration within the meaning of Schedule B1 to the Insolvency Act 1986 …”

In other words, under the 1996 Act (as amended) insolvency following the entering into of administration by any of the three routes identified in the Insolvency Act (as amended) is sufficient for the exclusion provision relating to pay when paid clauses to be triggered.


4.1 Background

  1. The terms of the sub-contract between Hare and Shepherd were negotiated during the period between October and December 2008. Although it is suggested that during this period Shepherd knew about Trinity’s financial difficulties but did not reveal those matters to Hare, this is not a matter which, in my judgment, is directly relevant to the issues before me on the present application (although it is easy to see how it might be relevant to subsequent claims). I therefore make no finding on that issue, which would in any event require oral evidence.

  2. I am, of course, obliged pursuant to Investors Compensation Scheme v. West Bromwich Building Society[1998] 1 WLR 886 to take into account the factual background to the agreement of the sub-contract. I am primarily concerned with the background to clause 32 because that is the principal provision of relevance. As regards that clause, it appears that:

(a) it was drafted in about 1998 by Masons (Shepherd’s former solicitors);

(b) it was probably intended to comply with section 113 of the Housing Grants (Construction and Regeneration) Act 1996 (it mirrors the unamended wording of that Act);

(c) it was an amendment to the standard form of sub-contract that the parties had agreed to use, and it was an amendment that was put forward by Shepherd;

(d) it was an amendment that was wholly in Shepherd’s interests, because it endeavoured to share with Hare the risk of the insolvency of Trinity, notwithstanding the fact that Hare had no contractual relationship with Trinity.

  1. The parties were also agreed that section 113 of the 1996 Act and the subsequent changes to it brought about by the Enterprise Act 2002 were also a relevant part of the background to the sub-contract. They are agreed that they should be taken to have known about the prohibition on pay when paid clauses, the exception at clause 32, and the changes to the administration regime identified in the amendments to section 113; that is to say, the fact that administration can now be achieved by three different routes rather than one.

4.2 The Relevant Clauses

  1. Clause 32.2 was in these terms:

“For the purposes of clause 32.1 a company becomes insolvent

32.2.1 on the making of an administration order against it under Part II of the Insolvency Act 1986;

32.2.2 on the appointment of an administrative receiver or a receiver or manager of its property under Chapter 1 of Part III of that Act or the appointment of a receiver under Chapter 2 of that Part;

32.2.3 on the passing of a resolution for voluntary winding up without a declaration of solvency under section 89 of that Act; or

32.2.4 on the making of a winding-up order under Part IV or V of that Act.”

  1. Clause 29.3 is also of some relevance because it dealt with the potential consequences of Hare’s insolvency. It provided:

“… if the sub-contractor makes a composition or arrangement with his creditors or becomes bankrupt or being a company … under the Insolvency Act 1986 or any amendment or re-enactment thereof has an administrator or an administrative receiver appointed then … the contractor may, by notice to the sub-contractor, determine the employment of the sub-contractor under this sub-contract and such determination shall take effect on the date of receipt of such notice.”

  1. Therefore, as Mr. Brannigan rightly notes, the words “under the Insolvency Act 1986 or any amendment or re-enactment thereof” in clause 29.3 was sufficient to cover, amongst other things, the different methods of appointing an administrator now set out in Schedule B1 to the Insolvency Act as amended. He contrasts that with clause 32, which does not contain similar words.


  1. On 2nd March 2009, Hare issued Application 5 in the gross sum of £5.8 million-odd plus VAT. On 8th April Shepherd valued this application in the net sum of £569,601.75 plus VAT. However, they withheld that sum because of what they referred to as Trinity’s insolvency.

  2. The evidence as to Trinity’s financial position was this. At a meeting on 11th March 2009, following the withdrawal of their bank’s support, the Board of Directors of Trinity resolved to place Trinity into administration with immediate effect. Shepherd were present at that meeting as observers and they were formally told about the decision later that same day when Trinity also filed at court Form 2.8B (Notice of Intention to Appoint an Administrator).

  3. On 19th March Trinity filed two more documents at court: Form 2.9B (Notice of Appointment of an Administrator by a Company and Directors) and two Forms 2.2B (Statement of Proposed Administrator). Further to Schedule B1 this meant that administrators were appointed upon and by the filing of the notices on 19th March, without any separate order of the court.

  4. On 25th March 2009 Hare issued Application 6 in the gross sum of £9.3 million-odd plus VAT. On 8th May Shepherd valued this application in the net sum of £427,081.60 plus VAT but again withheld the sum on the basis of Trinity’s insolvency.

  5. On 27th May 2009 Hare issued these proceedings. In particulars of claim served the same day the relief they sought was identified in the following terms:

“1. The following declarations and each of them:

(a) No administrative order has been made against Trinity under Part II of the Insolvency Act 1986;

(b) No administrative receiver or manager has been appointed in relation to Trinity’s property under Chapter I and Part III of that Act nor has a receiver been appointed under Chapter 2 of that Part;

(c) No resolution has been passed by Trinity for voluntary winding-up without a declaration of solvency under section 89 of that Act;

(d) No winding-up order under Part IV or V of that Act has been made in respect of Trinity;

(e) Accordingly, Trinity was not insolvent for the purposes of and is defined at clause 32.2 of the sub-contract as at 8th April 2009 or 8th May 2009, the dates of its withholding notices; and

(f) As a result, William Hare is entitled to recover the certified sums of £569,601.75 plus VAT in relation to Valuation 5 and £427,081.60 plus VAT in relation to Valuation 6.

2. Judgment for those sums together with an order that the said sums be paid by Shepherd forthwith.

3. Interest in relation to those sums at such a rate at such period as the court deems fit pursuant to section 51(a) of the Supreme Court Act 1981.”


6.1 The Words Used

  1. In any dispute about the meaning and effect of a particular contractual provision, “the starting point is necessarily the words which they actually used and the natural and ordinary meaning of those words”: see Patten J (as he then was) in Ellse v. Hill-Pickford [2006] EWHC 2093 (Ch). This reflects Lord Hoffmann’s remark in Investorsthat “we do not easily accept that people have made linguistic mistakes particularly in formal documents”.

  2. Care is always needed to ensure that words are not interpreted too literally and at the expense of what has been called business common sense. In Sirius Insurance Co. v. FAI General Insurance [2004] UKHL 54, [2004] 1 WLR 3251 Lord Steyn said at paragraph 19 of his speech:

There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen RederiernaAB [1985] AC 191, Lord Diplock, in an opinion concurred in by his fellow Law Lords, observed (at 201):

‘if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd[1997] AC 749, I explained the rationale of this approach as follows (771A-B):

‘In determining the meaning of the language of a commercial contract . . . the law . . . generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language.’

The tendency should therefore generally speaking be against literalism. What is literalism? It will depend on the context. But an example is given in The Works of William Paley (1838 ed), Vol III, 60. The moral philosophy of Paley influenced thinking on contract in the 19th century. The example is as follows: The tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process. This approach was affirmed by the decisions of the House in Mannai Investment Co Limited v Eagle Star Life Assurance Co Limited[1997] AC 749, at 775 E-G, per Lord Hoffmann and in Investors Compensation Scheme Limited v West Bromwich Building Society[1998] 1 WLR 896, at 913D-E, per Lord Hoffmann.”

  1. It is to be noted that in Sirius the argument being put forward by FAI as to the correct interpretation of the Tomlinorder in question was described by Lord Steyn as being “so extraordinary as to be commercially implausible”. As a result, even though the words of the order did not literally provide for payment, the House of Lords concluded that this was the only sensible interpretation of the words used. It was, therefore, a relatively extreme case.

6.2 The Effect of Changing Legislation

  1. Where a contract or deed incorporates the provisions of a statute or subordinate legislation there is no presumption either way as to whether the reference is to the law for the time being in force: see Ashworth Frazer Limited v. Gloucester City Council, Chancery Division, 24th February 1999 (unreported). The answer will depend on the proper construction of the words of incorporation in the context in which they are used: see Brewers Co. v. Viewpan plc [1989] 45 EG 153. In Ashworth Frazer the judge said:

“Where, however, the provisions of the legislation are not referred to for their normative content but simply used as a convenient shorthand to describe a factual situation, it must, in my judgment, be rare that the parties will have intended that situation to vary unpredictably with the vagaries of future legislation.”

  1. A recent Court of Appeal decision shows a relatively flexible approach to this problem. In Debenhams Retail plc v. Sun Alliance and London Assurance Company Limited[2005] EWCA (Civ) 868, the difficulty was that the lease (which dated from 1965) talked about gross amount of total sales. At that time purchase tax was levied on certain goods but only on wholesalers, not retailers. That tax was replaced by VAT in 1973 which worked in a very different way. The issue was whether VAT was included in the gross amount of total sales. The Court of Appeal decided that it was. Jacob LJ said:

18. I also agree with the Judge that the words are to be construed in their commercial context. Indeed it is because I place even greater emphasis on commercial context, that I disagree with him.

19. What would have mattered to the businessmen negotiating this lease or agreement for a lease is money. Form would be a secondary consideration. Putting on one side formalities, purchase tax would have had a significant effect on what was actually paid by way of rent. For it was an inbuilt cost to Debenhams. …

20. So I cannot see why the parties would have regarded a substitute for purchase tax which also affected ultimate prices as excluded by the words gross amount of the total sales including services from trade. As a commercial matter, tax was included originally and is included now. It is just that the tax is levied further down the chain of supply now than it was in 1965.”

6.3 Contra Proferentem

  1. When there is doubt about the meaning of a contract term, the words may be construed against the person who put them forward: see Lexi Holdings plc v. Stainforth [2006] EWCA Civ 988. This rule has been described as “a principle not only the law but of justice”: see Sedley LJ in British Travel Agents Limited v. British Airways plc [2000] 2 All ER (Comm) 24.

  2. The party putting forward the words in question can be taken to be either the party who introduced the words into the contract, or the party who benefits from those words: see Youell v. Bland Welch & Company [1992] 2 Lloyds Rep 127. In the present case that would be Shepherd on both counts.


7.1. The Issues

  1. There is no dispute that, for what it may be worth, Hare are entitled to the declarations set out at paragraph 26(b), (c) and (d) above. None of those events have happened. It is also common ground that, by reference to the declaration sought at (a) in the same paragraph, no administration order has been made by the court in relation to Trinity. However, Mr. Furst argued that the declaration noted in paragraph 26(a) above should not be granted because, in the light of the amendments to the Insolvency Act introduced by the Enterprise Act 2002, it is not now appropriate or correct to talk about an administration order under Part II of the 1986 Act. He submitted that, in the ordinary case, there was no such thing.

  2. Mr Furst also submitted that it would be an absurd result if clause 32.2(a) of the sub-contract, which referred to what was originally the only type of administration, namely by court order, was now read as excluding the other two kinds of administration introduced by the Enterprise Act. He says that clause 32.2(a) should be taken to read “on the appointment of an administrator under Schedule B1 of the Insolvency Act 1986”.

  3. On behalf of Hare, Mr. Brannigan’s submission was that the declaration noted at paragraph 26(a) above was entirely justified because, as a matter of construction, the words of clause 32.2(a) meant what they said, and gave rise to a perfectly coherent and sensible outcome. He submitted that it was still appropriate to talk about an order under Part II of the Insolvency Act 1986 because that part of the Act has not been replaced, merely had its original contents substituted for new provisions. Moreover he maintained that, because the parties must be taken to have known when they made their sub-contract that there were three routes to administration possible, their decision to choose to include only one route in clause 3.2(a) should be upheld by the court.

  4. I propose to deal first with Mr. Furst’s submission that clause 32.2(a) as drafted is incapable of producing a workable or coherent result. I then go on to deal with the parties’ very different cases on construction.

7.2 Do The Words As Drafted Give Rise To A Coherent Result?

  1. In my judgment, the words of clause 32.2(a) as drafted do give rise to a coherent result. What is more, it is a commercially sensible outcome which, because of its reference to an administration order by the court, might be thought to provide Hare (and indeed Shepherd) with at least some measure of involvement prior to Trinity going into administration, which any other construction would not provide. It is therefore far removed from the situation in Siriusand even further away from the example taken from The Works of William Paley cited by Lord Steyn. The reasons for this conclusion are set out below.

  2. Although the amendment process triggered by the Enterprise Act 2002 is undoubtedly messy, the overall effect is, I think, clear. It is summarised by Sealy and Milman in their Annotated Guide to the Insolvency Legislation, eleventh edition, in this way:


There are now two administration regimes each governed by what is referred to in the legislation as Part II of IA 1986. The original Part II is set out with annotations below. The new Part II is to be found in Schedule B1 of the Act below at pages 519 et seq. The new Part II applies to all administrations commenced after September 15th 2003 except in the relatively few cases to which EA 2002 section 249 applies. In order to distinguish between the original and the new Parts, the statutory text of the former has been set in italics and the same distinction is made in the corresponding Rules.”

  1. So Part II of the Insolvency Act not only continues to exist but it has two very specific purposes. First, the new Part II provides the home for Schedule B1. It is the place you go in the Act to find the reference to Schedule B1, which then sets out the three routes to administration in most ordinary cases. And, secondly, Part II sets out the procedure to be followed when or if one of the special companies noted in section 249 of the Enterprise Act 2002 has to be put into administration.

  2. Accordingly, in my judgment, it is not right to say that there is now no such thing as an administration order under Part II of the Act. Such an order can be made in relation to one of the special companies; further, an administration order can also be made under Part II by reference to Schedule B1, paragraphs 10 to 13, because that is one of the three ways in which a company can still be put into administration.

  3. Furthermore, I accept that this option might have some advantages over the other two self-certifying options which can also be found in Schedule B1, at least as far as Hare is concerned. The potential problem with the self-certifying options is just that: a company can go into administration simply by filling out the relevant forms. The scrutiny of such a decision comes after the company has gone into administration rather than, as with the making of an administration order by the court, before. That might make a difference to creditors like Hare and Shepherd because, for example, the court can allow a third party to be heard before making the decision as to whether or not to make an administration order. There is, of course, no such safeguard under the self-certifying procedure. Any hearing comes after the company has entered into administration, when very different priorities may be in play.

  4. Thus it seems to me the comparison which Mr. Furst sought to draw between Hare’s reliance upon the words of clause 32.2 and the position adopted in Sirius by FAI was unsound. The result, if Hare are right, does not give rise to a result that is “so extraordinary as to be commercially implausible”. It is not a literalist absurdity at the expense of commercial common sense. On the contrary, so it seems to me, it is a result which is both cogent and clear.

  5. The remaining issue is whether Hare’s construction, which emphasises that only one of the administration routes is identified in the words used in clause 32, is to be preferred or whether, in all the circumstances, the right construction involves the rewriting of the provision to allow for the amendments to the Insolvency Act 1986, as advocated by Mr. Furst. I am in no doubt that Hare’s construction of clause 32 is to be preferred. There are again a number of reasons for that.

7.3 Reason 1: The Words Used

  1. The first reason why I prefer Hare’s construction is that it is based on the plain meaning of the words used, no more and no less. I have already explained why those words produce a cogent arrangement, not a literal absurdity. There is, to paraphrase Lord Hoffmann, no reason to believe that the parties in this case did not intend to use these words and nothing to say that they made a mistake in using these words in their formal sub-contract. In accordance with the principles and authorities noted in section 6.1 above, I consider that Hare’s construction is therefore the appropriate one to adopt.

  2. I contrast that with Shepherd’s construction, which involves a significant rewording of the clause, so that instead of referring to the making of an administration order against Trinity, it would have to refer to the appointment of an administrator under Schedule B1. There is, of course, no claim for rectification and no suggestion of mistake, and it would be an unusual construction that, in the absence of those factors, could legitimately involve such a departure from the words actually used. In my view no basis for such a departure has been identified here.

7.4 Reason 2: The Nature Of The Clause

  1. The second reason why I prefer Hare’s construction is on a consideration of the nature of clause 32 itself. This is a pay when paid provision. It is endeavouring to identify the circumstances in which Hare can do a considerable amount of work for Shepherd under the sub-contract and then not be paid a penny for that work. It is attempting to pass on to Hare, who do not have a contract with Trinity or any obvious means of recovery against Trinity, the risk that Shepherd (who do have a contract with Trinity and have presumably done the necessary financial checks and ensured that proper warranties are in place) may not be paid under their main contract in respect of the sub-contract works. It is a form of exclusion clause.

  2. In those circumstances the court is required to ensure that Shepherd are kept to the four corners of their bargain with Hare and that a clause of this nature is not rewritten to expand the circumstances in which Hare might find themselves (through no fault of their own) significantly out of pocket because of a financial failure up the contractual chain. Traditionally, pay when paid clauses were construed narrowly against those seeking to rely upon them; see Thomas Dyer v. Bishop International Engineering Company 303F.2d 655 (USA) and the Commonwealth cases referred to at paragraph 17-058 of Keating on Construction Contracts, eighth edition 2006. I consider that, in this case, that approach only confirms the conclusions as to construction that I have reached.

7.5 Reason 3: The Timing Of The Sub-Contract

  1. The third factor which has led me to prefer Hare’s construction is the timing of the sub-contract in this case. If the parties had entered into this sub-contract in, say, 2001, so that the legislative amendments had happened after the contract had been made, then Mr. Furst may have been in a stronger position to argue for his construction, although even then he would have had to have dealt with some of the arguments that I have outlined above, and the point about clause 29, which appeared expressly to allow for future amendments in a way which clause 32 did not.

  2. But that is not what happened. In this case the sub-contract between Shepherd and Hare was made over five years after the amendments had come into force. Yet clause 32 made no reference to the administration options introduced by those amendments. In circumstances where the parties are agreed that they must be deemed to have known about the amendments when they made the sub-contract, it strengthens rather than weakens Hare’s construction of the relevant provision. In these circumstances it is appropriate to view the failure to amend clause 32 as a choice, as a deliberate decision to include one particular method of administration, but not those self-certifying alternatives introduced by the new legislation.

  3. The situation here is therefore the polar opposite of the principles noted in section 6.2 above and the Debenhams case in particular. In that case the law changed after the lease was granted such that the court was obliged to construe the lease by reference to legislation which had not been foreseen at the time when it was executed. Here, the law changed long before the contract was made and yet the parties did not seek to make any attempt to amend clause 32 to reflect those changes. That is therefore a third reason why I prefer Hare’s construction of the sub-contract.

7.6 Contra Proferentem

  1. In the light of my firm conclusion as to the proper construction of the relevant contractual provision, this is not really a case in which the contra proferentem principle is of significance. However, if I was wrong about the construction such that it was much less clear whether the self-certifying options had been included or not, the principles I have outlined in section 6.3 above would again be relevant and would again lead to a result in Hare’s favour.

7.7 The Interpretation Act and Schedule 17 of the Enterprise Act 2002

  1. Out of completeness I should deal with an argument raised by Mr. Furst under section 17 and 23 of the Interpretation Act 1978 to the effect that the reference in clause 32 to an administration order should be read “as if it were replaced by the appointment of an administrator under Schedule B1”. Mr. Brannigan and Mr. Nissen argued that the Interpretation Act was of no effect in the present case because the amendments to the Insolvency Act were not introduced after the contract had been made, but over five years before.

  2. In his oral submissions Mr. Furst accepted that, because the legislation had changed before the execution of the sub-contract, the Interpretation Act was not of relevance. It seems to me that that concession was rightly made.

  3. In similar vein, Shepherd relied on Schedule 17 of the Enterprise Act 2002 which provided that a contract made before the Act, which referred to an administration order “shall be treated as including the reference to the appointment of an administrator under paragraphs 14 and 22 of Schedule B1 …” Again, Shepherd were obliged to accept that this was of no direct application to the present case, because the sub-contract was made years after the 2002 Act. Again, Hare submitted that if the contract was made after the amendments, but only referred to one rather than all the routes to administration, then not only did the Schedule not apply, but the express reference to the court order route could not be taken to refer to all three; that effectively a choice had been made. I accept that submission for the reasons that I have already given.

7.8 An Alternative View

  1. Finally, I should say that if, contrary to my primary view, I had been persuaded that the changes to the legislation did warrant a change to the words in clause 32, I am firmly of the view that the only change that could be justified would be a change from “on the making of an administration order against it under Part II of the Insolvency Act 1986”, to “on the making of an administration order against it under Schedule B1 of the Insolvency Act 1986”. That would again mean that Trinity’s alleged insolvency would not be covered by the clause as amended and would make no difference to the outcome of this application.


  1. For the reasons I have given, I consider that the declarations set out at paragraph 27 1 above should be granted. I consider that, on a true construction of clause 32.2(a), the clause only bites if Trinity were the subject of an administration order under Part II of the Insolvency Act 1986, as amended. Since Trinity are not the subject of such an order, Shepherd’s withholding notices are invalid. Hare are therefore entitled to be paid the sums identified in paragraphs 22 and 25 above.

For the reasons that I have explained, I make no order in respect of the separate dispute between Shepherd and Reynolds. It will be for the parties to consider whether this Judgment is decisive of that separate dispute or whether Shepherd can identify any significant differences which would make this Judgment distinguishable. That, however, is for another day.