PAYMENT SUSPENSION IN CONSTRUCTION
CONTRACTS
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RESTRICTIONS ON THE USE OF PAYMENT SUSPENSION PROVISIONS
SUMMARY FOR INSOLVENCY PRACTITIONERS
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Prepared by Acuity Legal Limited (` Acuity `)
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Britannia Quay
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Cardiff
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Tel: 029 2048 2288

Payment Suspension in Construction Contracts – for Insolvency Practitioners
Summary Note
The Housing Grants, Construction and Regeneration Act 1996
Local Development, Economic Development and Construction Act 2009 (enacted 2011)
Melville Dundas Limited (in receivership) v George Wimpey UK Limited [2007] UKHL 18
Under the 2009 Act – section 111(10) provides an automatic exemption from the requirement to pay a notified sum (and therefore an exemption from the requirement for a Pay Less Notice) only if and to the extent that the underlying contract contains a term that expressly provides that the payer need not pay any sum due on the payees ’ insolvency and the payee has become insolvent after the date for the issue of the pay less notice (which may be prescribed in the contract).
The first point of note is that under the 2009 Act, the possible uncertainty caused by the
Melville Dundas case has been resolved and the exemption from serving a pay less notice to avoid making payment is restricted to contracts that have the express provision included and restricted to where the payee becomes insolvent after the date for issue. Thus on insolvency after the date for the notice, the payer is absolved automatically from making payment under section 111(1) (if their contract has the relevant provision). If the contract does not have such provision, then the exemption does not apply at all.
If the payee becomes insolvent before the date for the pay less notice, then it is our view that the payer should deal with it by serving a pay less notice as per the provisions of their contract and the Act. Then they are absolved from making payment of the notified sum in the usual way.
The payer will have to properly set out in the notice what is actually due at the date of the notice (which may well be a positive sum) and make payment of that sum or, in some cases, the contract may provide that on insolvency no payment is due at all. In that case, the payer can specify a sum of £0 as being due, when they issue the pay less notice, in order to avoid making any payment at all.
Thus, where a contract has the relevant provisions then it may be of some benefit for the payee to go into insolvency before the date for the pay less notice, as the payer can only avoid the payment (either in whole or at least can avoid paying sums that may not in fact be properly due depending on the terms of the contract), by serving a pay less notice. However, they do not automatically become able to avoid making the payment altogether. Further, the payer may forget to serve a notice at all - so there is that potential benefit to going insolvent before the date for the notice.
Acuity Legal Limited
23 April 2015

23 April 2015

Claire Sharp, Senior Associate
Corporate Recovery & Insolvency

• LDEDCA 2009 (enacted 2011) and Payment Suspension in
Construction Contracts
• Personal guarantees in construction contracts

• Introduction – new restrictions on the use of payment suspension provisions for insolvent contractors and subcontractors
• Context – previous downturn in economic market leading to tendering on negative margins
• Insolvency Practitioners - important to be well informed as to the rules relating to payment suspensions in order that you are able to obtain all payments owed to the insolvent party under subsisting contracts

• The Legislation – HGCRA 1996 (s.109/110/111) and LDEDCA
2009
Cases -
• Melville Dundas Limited (in receivership) v George Wimpey UK
Limited (2007)
• Wilson & Sharp Investments Limited v Harbourview
Developments Limited (2014)
• Impact on payment suspension and key points to note for
Insolvency Practioners – the ability to suspend payments must now be set out in contract itself and what about the date of appointment?

• “In consideration of your agreement to supply goods to the applicant on credit, I/we the undersigned being the shareholder(s)/director(s)/member(s) of the applicant hereby personally guarantee payment of all the financial obligations arising from the provision of (or increase in) the credit facilities granted by Building
Supplier Limited. I/we also agree to indemnify Building Supplier Limited against all losses incurred by them and arising as a consequence of their provision of credit facilities to the applicant where this credit guarantee and indemnity are undertaking on a joint and several basis by those signing. I/we have been provided with the opportunity to seek the independent legal advice of a solicitor and declined to do so. I/we further acknowledge and have had notice that such guarantee and indemnity appropriate obligations will be enforceable against me in my individual capacity.”

• “In consideration of your agreeing to supply goods to the applicant company on credit, we the undersigned being owner/director/directors of the applicant company jointly and severally guarantee payment of all the financial obligations.”

• Personal insolvency
• Trying to negotiate a deal when impacted by insolvency of company
• Over a barrel if supplier protected by PG

• Red hand of Lord Denning – J Spurling Limited v Bradshaw
[1956] EWCA Civ 3
• Applies to tickets cases i.e. other documents incorporated into contract

• Mistake of law does not render contract void
• Mistake of fact can render agreement void if mistake regards fact essential to agreement e.g. dead horse
• The Unfair Terms in Consumer Contract
Regulations 1999
• “Consumer = any natural person who is acting for purposes outside his trade, business or profession”
• Unfair terms shall not be binding upon the consumer

• Misrepresentation
• Statute of Frauds – must be in writing and signed by guarantor. Query over being signed in capacity as director resolved by Brandon Hire
PLC v Barrett (2014) EWCA
Civ 164. The word
“personally” is key!

Claire Sharp
Senior Associate dd: 029 2067 4451 e-mail: csharp@acuitylegal.co.uk
Jonathan Culley
Associate dd: 029 2067 4460 e-mail: jculley@acuitylegal.co.uk
Jonathan Stroud
Solicitor dd: 029 2067 4466 e-mail: jstroud@acuitylegal.co.uk