Melville Dundas Ltd (in receivership) & Ors v George Wimpey UK Ltd & Ors

A provision in the 1998 JCT Building Contract providing that, once a “final date for payment” of a sum had passed, the sum could retrospectively cease to be due for payment has come under scrutiny by the House of Lords. A bare majority reached the conclusion that the provision did not contravene the HGCRA. In addition, the absence of a withholding notice under s.111 did not prevent the employer from withholding payment.

Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Lord Mance and Lord Neuberger of Abbotsbury - House of Lords

Background

George Wimpey Ltd (“Wimpey”) contracted with Melville Dundas Ltd (“the contractor”) for the construction of a housing development in Glasgow. The contract incorporated the 1998 JCT Standard Form of Building Contract with Contractor’s Design.
The contractor applied for an interim payment of almost £400k. There was no dispute that the contract was due that payment. However, after the final date for payment had passed but before Wimpey had paid the contractor, the contractor went into administrative receivership. The contract gave Wimpey the right to determine the contract in the event that the contractor went into administrative receivership, which right Wimpey duly exercised.

Decision

The matter before the court was whether the interim payment remained payable by Wimpey to the contractor. Essentially, this boiled down to two issues:

Do the insolvency provisions of the JCT Contract violate the HGCRA?

• Clause 27.3.4 gave the employer the right to determine the contract in the event that the contractor went into administrative receivership. Proper determination of the contract under clause 27.3.4 triggers clause 27.6.5.1.
• Clause 27.6.5.1 stipulated that the provisions of the contract which required “any further payment” by the employer to the contractor would not apply where the contract was properly determined. The effect of this clause was that, upon proper determination of the contract, no further interim sums were payable. In other words, once a “final date for payment” of a sum had passed, that sum could retrospectively cease to be due for payment in certain circumstances.
• Ss.109 and 110(1) of 1996 Act provide that contractors are entitled to interim payments and that construction contracts must include a mechanism for determining what payments become due under the contract.

The majority of the law lords took the view that the purpose of the payment provisions (ss.109-113) in the 1996 Act was to ensure sufficient cash flow for the contractor to enable him to perform his duties under the contract. However, when the contractor’s employment had been determined in consequence of the appointment of a receiver, two consequences followed:

i) the contractor no longer had any duties to perform; and
ii) the liability to make an interim payment was no longer provisional.

The majority thought it unlikely that Parliament had intended for the HGCRA to determine priorities between the employer and an insolvent contractor’s other creditors. Upon insolvency, liability to make an interim payment became a matter not related to cash flow, but to the substantive rights of the employer and the contractor’s creditors.

Under the general law of bankruptcy, the employer had a right to set-off a debt owed to an insolvent company in full against his own claim in liquidation. Parties to a construction contract are entitled to the benefit of the doctrine just like anyone else. Thus, the majority reached the conclusion that on a purposive interpretation of the HGCRA, the insolvency provisions in the JCT Building Contract did not conflict with the statute.

Was the absence of a withholding notice pursuant to s.111 fatal to Wimpey’s claim?

• S.111 of the HGCRA stipulates that in order for a party under a construction contract to withhold any payments, it must give the other party notice of its intention to withhold payment.
• Cl.30.3.4 provided for such a notice and that it had to be issued no later than five days before the final date for payment.

By the time Wimpey became entitled to determine the contract and withhold payment, the five-day window in which Wimpey could issue its notice of intention to withhold payment had expired. No notice was issued. In these circumstances, was the withholding of the payment valid?

The majority held that that Wimpey was entitled to withhold payment notwithstanding the absence of a notice to withhold payment. The withholding was valid because s.111(1) did not apply where there was a lawful ground for withholding payment and in the nature of things it would not have been possible for notice to have been given within the statutory time frame.

Whether this principle applies beyond insolvency cases remains to be seen.

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See another article on this case: First Construction Act case in the House of Lords

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