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Direct Payments to Sub Contractors
Sometimes main contractors experience financial difficulties
which mean that their sub-contractors experience delays in
receiving payment. It is not unknown for employers to agree to make
payments direct to the sub-contractor in order to try and ensure
continued progress on site. The Court of Appeal has given a clear
indication that in those circumstances, in order to be enforceable,
the agreement must be evidenced in writing or risks failing because
of a 17th century piece of legislation
The Facts
In May 1999 an employer (E) contracted with a main contractor
(M) to build a factory. In August 1999 a sub-contractor (S) agreed
to provide M with labour for the contract works.
From the very early stages of its involvement S suffered late
payment from M and periodically S threatened to pull its workforce
from the site.
By 11 February 2000 a sum in excess of £197,000 was still
outstanding on the invoice S had rendered to M in December
1999.
S claimed that on 11 February 2000, an agreement was reached
between S and E that if S agreed not to pull its workforce from
site, E would ensure that S would receive any money due to it from
M under the contract for provision of labour, if necessary by
redirecting to S, payments due from E to M. S did not allege that M
was a party to this agreement or that it ever accepted that money
due to it could be paid to S.
S kept its workforce on site until March 2000, by which time it
was clear that M could not meet its liability to S, which had now
risen to in excess of £1.3m, nor would E pay S so S withdrew from
site.
S sued both E and M in May 2000. S obtained a judgement against
M in June 2000 but it proved worthless as M was subsequently
liquidated. S sought recovery against E pursuant to the agreement
of 11 February 2000.
As well as disputing the factual allegations and disputing that
it ever entered into the 11 February 2000 agreement, E alleged that
in any event the agreement constituted a guarantee which, in the
absence of written evidence as to its terms signed by E's
representative, was unenforceable by virtue of Section 4 of the
Statute of Frauds 1677. On that basis E applied for summary
judgement against S to strike out the claim brought against it. The
judge dismissed the application and E subsequently appealed.
Section 4 Statute of Frauds 1677
The relevant text of Section 4 of the Statute of Frauds 1677,
for the purposes of the appeal, reads as follows:-
"No action shall be brought … whereby to charge the Defendant
upon any special promise to answer for the debt, default or
miscarriage of another person … unless the agreement upon such
action shall be brought or some memorandum or note thereof shall be
in writing and signed by the party to be charged therewith or some
other person thereunto by him lawfully authorised."
The Court of Appeal's Decision
On appeal the Court of Appeal held that an agreement between E
and S, to induce S to continue work for M, that if S is not paid by
M, E would to that extent redirect to S, monies due from E to M,
was a guarantee within the meaning of Section 4 of the Statute of
Frauds ie:
"a special promise to answer for the debt or default of another
person"
and as it was not recorded in writing it was unenforceable as
against E. The Court allowed E's appeal and struck out the claim
against it.
Conclusion
Any sub-contractor who is facing payment difficulties from the
main contractor and who is presented with a proposal for payment of
money due to it from the main contractor by the employer direct
must, as the Court of Appeal has re-emphasised, ensure that the
terms of any agreement entered into to that effect are recorded in
writing and countersigned by the employer's representative.
Obtaining the approval of the main contractor to the arrangement,
evidenced preferably by the signature of the main contractor's
representative to the written agreement, would also remove a
further potential complication in ensuring that money which might
have originally been due to the main contractor from the employer
is redirected to the sub-contractor.