Durabella Ltd v J Jarvis & Sons Plc
It was not possible to conclude that the contractor's 'pay when paid' clause in its standard terms and conditions of contract which was incorporated into the sub-contract was unreasonable in itself
19 September, 2001
One of the issues for determination was whether the contractor could validly rely on the "pay when paid" clause in those terms and conditions. Judge LLoyd held that it was not possible to conclude that the ?pay when paid? clause was unreasonable in itself but that it could not rely on the clause in the circumstances of the instant case. The judge pointed out that it was established both by common law and by section 3(2) of the Unfair Contract Terms Act 1977 that a contractor could not rely on a ?pay when paid? clause in its standard terms and conditions of contract if the reason for non-payment was its own breach of contract or default on the basis that it was trite law that a person could not take an advantage from his own breach. Section 113(1) of the Construction Act 1996 rendered ineffective such a clause unless the (third) party providing the monies to the paying party under the contract became insolvent. However, the Act (1) could not reliably be used as a contemporary (or retroactive) indicator of construction industry practice as a whole taking into account the fact that certain sectors of the industry, such as water, oil and gas, were exempted from the application of the Act entirely, including the provisions of section 113, with the result that the absence of an industry-wide prohibition on such clauses in the Act strongly suggested that such a clause in some areas was not only not unreasonable but was also a fair apportionment of some of the common risks of contracting and (2) expressly did not render such a clause ineffective in the case of insolvency with the result that this principal reason for such a clause was recognised as not being unreasonable. Finally sections 109 and 110 provided that payment periods could be agreed which had the effect of ensuring that payments to a sub-contractor did not have to be made until after the time when payment should have been received by the contractor from the employer with the result that the risk of having to finance work before payment was received was either averted or at least minimised. Advice Note A ?pay when paid? clause is not unreasonable in itself but it will not be applied where it is prohibited under the Construction Act 1996.