Yet another ruse to get out of paying

Recently, I had an approach from a contractor who complained his progress payments had dried up because he had refused to sign a warranty. The relevant clause in his sub-contract was as follows:

"The provision of deeds of warranty ... [and] a performance bond (where required by the Contractor) and proof of insurance and similar documents as required by the Sub-Contract (where requested by the Contractor) shall be a condition precedent to payment to the Sub-Contractor by the Contractor."

Did the main contractor have a right, in these circumstances, not to make further payment? The problem is that we don't know what this clause really means. Does it entitle the payer to refuse to make any further payment even though a substantial amount of work has already been completed? Or does it entitle the payer to put off paying the sub-contractor for a certain period unless, in the meantime, he has provided the required warranty? If so, what would be the length of such a period?

The reasons for failure to provide the document(s) could be many. The sub-contractor may not have reached agreement with the payer on the terms of the warranty. Okay, he could have insisted that the relevant warranty should have been available for his agreement at the same time as he executed the sub-contract documentation. But his failure to agree the contents of the document(s) may have been due to the fault of the payer in insisting upon unreasonable and onerous terms. In spite of this, the sub-contractor is now being told that he will not receive another penny for the work carried out to date unless or until he signs the relevant document.

An example:

What does the law say? Where words used in a contract are full of ambiguities, a court would interpret them in a way that would be contrary to the interests of the party that drafted the contract. We need to go to a case decided by the Court of Appeal in November 1999. The case was Koch Hightex v New Millennium Experience Company Ltd, which, as the name indicates, arose out the construction of the Millennium Dome. Koch had successfully tendered for the supply and fitting of the roof for the dome. Initially a letter of intent was issued but it was superseded by a trade contract executed by both parties in July 1997. Under the Articles of Agreement, Koch was required to provide a parent company guarantee, a performance bond (with the surety or guarantor to be approved by the Millennium Company) and a direct warranty to the construction manager.

In August 1997 Koch learnt that the Millennium Company had decided to back out of the contract and, instead, give the roofing works to an American company. The Millennium Company then issued a notice to Koch terminating the trade contract. Since Koch had not, at that stage, provided the requisite guarantee and performance bond, it was informed that it would not be paid anything for the work completed up to the notice. This extraordinary situation was summed up by Lord Justice Chadwick as follows:

"If that contention is right and... [the Millennium Company] was in a position to serve a notice... determining the trade contract without any obligation to make any payment under... that trade agreement or at all. That result is said to arise from the fact that Koch chose, at its own risk, to continue to carry out works under the trade contract without having provided the performance bond and guarantee required under [that contract]."

In effect, the Millennium Company was saying the intention of the parties' was that the trade contractor would be expected to carry out the works without payment until the requisite bond and guarantee were provided. If they were not supplied, there would be no payment at all. Lord Justice Chadwick did not mince his words. This was "commercial nonsense".

So what was intended by this clause? The only sense that could be read into it was that, in the event of failure by the trade contractor to provide the bond/guarantee when the agreement was executed (or within a short time thereafter), the contract would come to an end. But the Millennium Company chose to treat the agreement as continuing and, then, made it impossible for the trade contractor to obtain the bond/guarantee when it (the company) decided to terminate the contract. Since the client had created such impossibility it must be taken to have waived reliance upon the so-called condition precedent.

To summarise:

Let's summarise the position. If you have a clause in a contract of the type set out at the beginning of this column, it does not provide the payer with an excuse to ignore his side of the agreement - the obligation to make payment. In fact, if he continues to issue instructions regarding the works even though he had not received the necessary signed documentation, he is likely to have waived his insistence on the condition. As Lord Justice Chadwick made clear, the payer should insist on the provision of the documentation at the time of the agreement or very quickly afterwards. It would be ridiculous for the payer to assume he can insist on the payee providing the necessary work without payment - unless or until the necessary paperwork was provided.

My sub-contractor should now inform his payer that the outstanding payment must be made immediately together with accrued interest. If payment is not received he should issue debt-recovery proceedings to recover the outstanding amount.

This article was originally published in Electrical Times magazine (December 2005 / January 2006 edition) by Nexus Media Communications - a Voltimum UK Media Partner.