Melville Dundas Ltd v George Wimpey UK Ltd – “Not possible”

29 June, 2007
by: Cripps

Just when we all thought that nothing got round a failure by an Employer to serve a s.110 ‘withholding notice’, the first Construction Act case to be decided by the House of Lords has allowed the Employer to keep its hands on the money, and has sent lawyers scuttling off to invent further arguments along the lines of ‘Not possible’.

 

Facts:

Wimpey was developing a housing estate in Glasgow and Melville Dundas was the Contractor. The building contract was JCT ’98 WCD with monthly interim payments.

On 2 May 2003 the Contractor applied for just short of £400,000. The 16 May was the final date for payment. It was common ground that Wimpey did not pay, nor did they issue a withholding notice. Normally this would mean that there could be no defence to the Contractor’s claim for payment.

However, on 22 May the bank appointed administrative receivers and on 30 May Wimpey exercised its discretion under JCT clause 27.3.4 to determine the Contractor’s employment.

The determination triggered clause 27.6.5.1 which lies at the heart of this particular dispute:

“…the provisions of this contract which require any further payment…to the contractor shall not apply;”

“provided that [this clause] shall not…prevent the enforcement by the contractor of…amounts properly due to be paid by the employer…which… have accrued 28 days or more before the [22nd May]”

There was no disagreement over the fact that the final date for payment (16 May) was less (not more) than 28 days before the appointment of a receiver (22 May), so the proviso did not apply.

Nevertheless the Contractor unsuccessfully argued that the phrase “any further payment” meant further liability and did not apply to a liability that had already arisen (on 16 May) prior to the determination (on 30 May). The Lords gave this short shrift and agreed that the contract meant that the Contractor was to be paid nothing more on an interim basis.

Thus, the crux of the matter was the conflict between the wording of the contract which allowed the Employer to hold on to the interim payment, and the Construction Act which says (at s.111(1)) that a party may not withhold payment after the final date for payment unless he has given an effective notice of intention to withhold payment. Which prevailed – the Act or the contract?

Interestingly, the House of Lords decided by a narrow 3:2 majority that the contract prevailed over the statute. Lord Hoffman’s view was that it was not possible for the Employer to have served a s.111 notice by 11 May (5 days before the final date for payment) because the earliest they could have known that they were entitled to withhold was on 22 May when the receivers were appointed. He construed the Act in a way which he believed was compatible with the contract, i.e. an instalment payable can cease to be payable! The majority view relied upon insolvency legislation which allows a creditor (the Employer) to set-off a debt owed to an insolvent company (the Contractor) against any sum it is owed, thus just leaving the balance as a debt to the creditor, as justification for keeping the Contractor out of the money.

The two minority decisions took a more literal interpretation of the Act which they said does not enable the question of whether a sum is still due, to be re-visited to take into account subsequent events. Lord Neuberger’s view is straightforward:

“if a statute provides that a person may not withhold payment after a specified date has passed, it appears to me that a contractual provision that he may do so must be ineffective”.

He also went on to reason that in his view the provisions of s.111 of the Act were not intended to be dis-applied in cases of insolvency. The position, nevertheless, is that the decision allowed the Employer to keep the money, despite it’s failure to have served a withholding notice. The prevailing argument seems to be that if a subsequent event occurs, after the date for giving the withholding notice, which is a lawful ground for withholding payment, then the fact that it was not possible for the notice to have been given within the statutory time frame, enables the statute to be inoperable in the circumstances.

What remains to be seen is whether this surprising interpretation will only be applied in similar circumstances of insolvency, or whether inventive arguments over other lawful intervening grounds will be sustained. If liability to pay can be drafted in such a way that certain circumstances can intervene so as to make an interim payment which has become due, subsequently cease to be due, then s.111 can be undermined. Those involved in amending contracts should consider s.109(2):

“The parties are free to agree the amounts of the payments and the…circumstances in which, they become due”.

This House of Lords decision allows those ‘circumstances’ to operate retrospectively, and thus to render ineffective, the requirement to serve a withholding notice, in circumstances where on the timeline it was not possible to comply.

Footnote:

There is provision under clause 27.5.3 of the JCT contract for the parties to enter into an interim arrangement for the Contractor to carry on working after a receiver has been appointed, pending novation or determination. The contract expressly provides that any right of set-off which the Employer may have is not exercisable in respect of payment under such interim arrangement. This provision does not sit easily with the House of Lords rationale on set-off in insolvency circumstances.

Reviewed in 2015