Pay when Certified Clauses – set-off against adjudication

R&C Electrical Engineers -v- Shaylor Construction (2012) CIL.TCC

Facts

Shaylor was the main contractor on the new Goscote Palliative Care Centre, Goscote Hospital, Walsall.  It sub-let the mechanical and electrical works to R&C.  The main contract provided for various certificates of completion and the sub-contract provided that R&C would not be paid until a corresponding certificate had been received under the main contract.  R&C and Shaylor could not agree upon R&C’s Final Account and Shaylor further argued that until it had a main contract Final Certificate then it was not obliged to pay a Final Account under the sub-contract.

R&C went to adjudication.  The adjudicator granted R&C £196,000 plus VAT but also ruled that as no Final Certificate had been issued under its Main Contract, the money is not yet due. Shaylor disagreed with the amount and further warned that it was going to make a substantial withholding against the Final Account.  R&C went to court arguing that they should simply be paid the £196,000 without waiting for the Final Certificate to be issued.

TCC Held:

1. Only in very extreme circumstances can it be argued that contractual machinery has broken down and this case was not within those circumstances.
2. Pay when certified clauses under the old law will be upheld by the court and the adjudicator’s Decision was correct.
3. Logically where a pay when certified clause operates to defer the point where a payment falls due, then the payee must have a right to withhold as long as he exercises it on the appropriate number of days before the Final Date calculated from the Due Date, and R&C were free to make any legitimate withholding claim if the facts permitted.

Comment

Pay when certified clauses will not be effective in contracts formed on or after 1 October 2011 because of new sub-section 110 (1A) of HGCRA.  Every construction contract must provide an adequate mechanism for determining what payments become due and this requirement is not satisfied if the contract makes the payment conditional either on performance of obligations under another contract or on a decision that by any person (such as a certifier) as to whether obligations under the contract have been performed.  The legal profession proved itself ingenious in developing pay when certified clauses to circumvent the original ban under the HGCRA Act (Section 113) on pay when paid clauses.  It remains to be seen how draftsmen will try to circumvent the new rules.

For more information help or advice please contact Rob Langley on 0191 211 7975 or email[email protected].