| Date | 16 May 2007 |
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| Judgment | Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd, House of Lords, 25 April 2007 |
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| The Issue | Tension between contractual provisions on insolvency and statutory requirements concerning the issue of withholding notices. |
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| Implication |
Section 111 of the HGCR Act does not apply to the withholding of sums already due in the event of determination of a contractor’s employment following insolvency. |
printThe House of Lords has issued a judgement in the first case to come before it in relation to the Housing Grants, Construction and Regeneration Act 1996. In what may become a controversial ruling, their Lordships decided by a majority that the contractual provisions in the parties’ contract dealing with determination and insolvency effectively trump the statutory provisions governing the need to issue a Withholding Notice under Section 111 of the HGCR Act. Readers may well be aware of the fact that this dispute was the subject of a previous article in this column when it came before the Inner House of the Court of Session in Scotland (the equivalent of the Court of Appeal in England). Nevertheless, the factual background is well worth repeating here. Acting as developer / employer, George Wimpey contracted with Melville Dundas Ltd for the design and construction of a housing development in Glasgow. The contract incorporated the conditions of the JCT Standard Form of Building Contract with Contractor’s Design (1998 edition). According to the provisions of that contract, the final date for payment of the amount due in an interim certificate was 14 days after receipt by the employer of the application. On 2 May 2003, Melville Dundas applied for an interim payment of £396,630. There was no dispute that the contractor was entitled to be paid that sum or that the final date for payment was therefore 16 May 2003. Wimpey did not pay on that date and on 22 May 2003, Melville Dundas’s bankers appointed administrative receivers. As it was entitled to do so under the terms of the contract, Wimpey determined the employment of Melville Dundas on 30 May 2003. In the Inner House, Melville Dundas was successful in overturning the judgement at first instance of Lord Clarke in the Outer House of the Court of Session. Lord Clarke had originally held that Sections 109 to 111 of the HGCR Act were concerned only with cash flow “arising during the course of a continuing, non-determined construction contract”. On appeal, the Inner House took a different view. They concluded that the final date for payment of the sum sued for under the contract had passed without any effective notice by Wimpey to withhold payment. Consequently, Wimpey was prohibited from withholding payment further. Wimpey appealed to the House of Lords. Their Lordships had to consider two issues. Firstly, they had to decide what was meant by the words “further payment” found in clause 27.6.5.1. Clause 27 governs the procedure to be adopted after determination of the employment of a contractor. This clause stated that in the event of determination, “the provisions of this contract which require any further payment or any release or further release of Retention to the contractor shall not apply”. Melville Dundas argued that once a sum had become due under the contract, it could not become undue. Accordingly, they believed that an amount, which was already due to be paid under the provisions of the contract before determination, could not be termed “a further payment”. However, all five judges held that, reading the contract on its own and in the absence of the statutory provisions, the words “any further payment” are unqualified and that their plain meaning is that the contractor ceases to be entitled to any further payment whatsoever. The second issue to be decided by the House of Lords was a lot more problematical. They had to decide whether the absence of an effective withholding notice under Section 111 of the HGCR Act prevented Wimpey from relying on the protection of clause 27.6.5.1, pending the balancing of the accounts. In a majority decision, Lord Hoffman said that it would not have been possible for Wimpey to serve a withholding notice by 11 May 2003, as receivers were not appointed until 22 May 2003. Accordingly, he believed that to make clause 27.6.5.1 subject to the notice requirement of Section 111 would be in effect to write it out of the contract. Lord Hope approached this issue by looking at the intention of Part 2 of the HGCR Act. He said that the Act was born out of concerns expressed in Sir Michael Latham’s report “Constructing the Team”. The main issues identified by Sir Michael Latham in his report were prompt payment, a right to interim payments and a clearly defined period for making payments. He therefore concluded that a purposive construction should be given to Section 111 of the HGCR Act, although he conceded it did not contain any obvious ambiguity. According to Lord Hope, Section 111 addresses the mischief of withholding payment (without notice) of stage payments and not the withholding of sums already due in the event of determination of the contractor’s employment. He went on to say that upon insolvency, liability to make an interim payment becomes a matter that relates not to cash flow but to the substantive rights of the employer on the one hand and the contractor’s creditors on the other. In conclusion, three judges agreed that Section 111 of the HGCR Act must be construed in a way that is compatible with the operation of clause 27.6.5.1. They reasoned that it could not have been Parliament’s intention to nullify the effect of clause 27.6.5.1 (which reflects well established bankruptcy law and procedure), not by an express provision in the statute, but by a device of providing a notice requirement with which the employer could never comply.
CJ-0719
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