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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> William Hare Ltd v Shepherd Construction Ltd [2009] EWHC 1603 (TCC) (25 June 2009) URL: https://www.bailii.org/ew/cases/EWHC/TCC/2009/1603.html Cite as: [2009] BLR 447, 125 Con LR 123, [2009] EWHC 1603 (TCC), [2010] BCC 332, [2009] CILL 2753 |
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HT-09-247 |
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
St. Dunstan's House 133-137 Fetter Lane London EC4A 1HD |
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B e f o r e :
____________________
WILLIAM HARE LIMITED |
Claimant |
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- and - |
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SHEPHERD CONSTRUCTION LIMITED |
Defendant |
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And |
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CR REYNOLDS |
Claimant |
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- and - |
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SHEPHERD CONSTRUCTION LIMITED |
Defendant |
____________________
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
Judgment
____________________
Crown Copyright ©
MR. JUSTICE COULSON:
1. INTRODUCTION
2. THE PRE 2002 LEGISLATION
"(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) 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.
"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.
3. THE ENTERPRISE ACT 2002
"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. "
"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
ADMINISTRATION
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.
"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. THE HARE SUBCONTRACT
4.1 Background
(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.
4.2 The Relevant Clauses
"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."
" 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."
5. THE FACTS
"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. THE RELEVANT PRINCIPLES
6.1 The Words Used
"There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen Rederierna AB [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."
6.2 The Effect of Changing Legislation
"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."
"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
7. ANALYSIS
7.1. The Issues
7.2 Do The Words As Drafted Give Rise To A Coherent Result?
"Important
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."
7.3 Reason 1: The Words Used
7.4 Reason 2: The Nature Of The Clause
7.5 Reason 3: The Timing Of The Sub-Contract
7.6 Contra Proferentem
7.7 The Interpretation Act and Schedule 17 of the Enterprise Act 2002
7.8 An Alternative View
8. SUMMARY