| Date | 22 August 2007 |
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| Judgment | Pierce Design International Ltd v Mark Johnston and Another, TCC, 17 July 2007 |
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| The Issue | Reliance upon determination under JCT 98 to avoid enforcement of payments that should have been made earlier. |
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| Implication |
The proviso within clause 27.6.5.1 should not be interpreted so as to enable an employer who determines a contract to escape the obligation to pay the full amounts of interim certificates that should have been paid more than 28 days before the date of the determination in circumstances where no withholding notices have been issued to reduce the sums certified as due. |
printReaders will recall a recent article about the House of Lords Decision in Melville Dundas v George Wimpey. Wimpey had certified a payment to Melville Dundas and the final date for payment had passed without a withholding notice having been issued. Within a few days of the final date for payment, Melville Dundas went into receivership. Wimpey then determined the contract and refused to pay the sum previously certified. The House of Lords decided that, by virtue of the determination clause, no further payment had to be made upon the determination and, further, that the absence of a withholding notice, which in accordance with the Housing Grants Act would normally prevent any defence to payment, did not trump the provisions of the determination clause under the contract. A similar issue has now been decided by His Honour Judge Peter Coulson QC, in the TCC, in the case of Pierce Design International Ltd v Mark Johnston and Another. The question before the court was whether an employer, who had not paid sums due to a contractor under the contract, could prevent the contractor from enforcing its right to payment by relying on its subsequent determination of the contractor’s employment under the contract. The facts of this case were that Mr & Mrs Johnston entered into a contract with Pierce Design International Ltd under the JCT 98 With Contractor’s Design standard form of contract to carry out construction works at their property in London. At the heart of the decision was the meaning and operation of clause 27.6.5.1 relating to determination. This reads as follows: “Subject to clauses 27.5.3 and 27.6.5.2 the provisions of this Contract which require any further payment or any release or further release of retention to the Contractor shall not apply provided that clause 27.6.5.1 shall not be construed so as to prevent the enforcement by the Contractor of any rights under this Contract in respect of amounts properly due to be paid by the Employer to the Contractor which the Employer has unreasonably not paid and which, where clause 27.3.4 applies, have accrued 28 days or more before the date when under clause 27.3.4 the Employer could first give notice to determine the employment of the Contractor or where clause 27.3.4 does not apply, which have accrued 28 days or more before the date of determination of the employment of the Contractor.” Between March and November 2006, the employer’s agent had issued 5 interim valuations but, in each case, part of the certified sum was unpaid by the employer without any withholding notice being issued. The total shortfall in payments amounted to £93,460.33. Some months later, following a notice of default, the employer purported to determine the contract on 30 March 2007. HHJ Coulson had to decide two issues. The first was whether, on the facts of the case, clause 27.6.5.1 fell outside Section 111 of the Housing Grants Act, because it purported to allow sums to be withheld without the serving of a withholding notice (requiring a consideration of Melville Dundas). The second issue was whether, assuming Clause 27.6.5.1 was in accordance with Section 111, the proviso within Clause 27.6.5.1 operated to prevent Johnston from resisting Pierce’s application for the sums due on the basis that those sums had been “unreasonably not paid” by Johnston (an issue not considered in Melville Dundas). In addressing the first issue, the judge observed that the principal issue for their Lordships in Melville Dundas was whether Clause 27.6.5.1 fell foul of sections 110 and 111 of the Construction Act because it allowed the employer not to pay a sum due, notwithstanding the absence of a withholding notice. He concluded that they had found that it did not. HHJ Coulson accepted Pierce’s submission that, broadly speaking, there were two factors that lead to this conclusion; namely the problems caused by the insolvency of Melville Dundas and the fact that it was impossible for Wimpey to issue a withholding notice before 16 May because the administrators were not appointed until 22 May and the contract was not determined until 30 May. Although he accepted that in the present case Pierce was not insolvent and Johnston had had ample time in which to serve withholding notices, he did not accept that he should then go on to find that the clause fell foul of the Act. Consequently, he found that he was bound by the decision of the House of Lords in Melville Dundas. With regard to the second issue, Pierce argued that the proviso within clause 27.6.5.1 meant that the absence of withholding notices meant that the sums due had unreasonably not been paid. Counsel for Johnston argued that what was reasonable must be judged by reference to what is reasonable now requiring a full investigation by the court at a full trial of all the issues. This proviso was not considered by the House of Lords in Melville Dundas because the right to payment had accrued less than 28 days before the determination. HHJ Coulson decided that the facts led to the conclusion that the first two parts of the proviso were met, namely that Johnston had failed to pay amounts properly due so that they were in breach, and that the sums fell due many months before the date of determination on 30 March 2007. Finally, he concluded that non-payment of a sum otherwise due can only be justified under the contract if a withholding notice is issued thereby reducing the amount due with the effect that the amount of the withholding no longer becomes due. He refused to accept Johnston’s argument that what must be considered is what is reasonable now since this gave rise to the unacceptable position that an employer could escape an earlier breach of non-payment by determining the contract, which would be contrary to the intention of the proviso. Consequently, he gave judgment in favour of Pierce Design in the sum of £93,460.33 plus interest.
CJ-0733
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