UK: Withholding Notice Still Required on Insolvency and Determination

In October 2004 the Court of Session issued a decision in the case of Melville Dundas Ltd v George Wimpey UK Ltd which appeared to take a significantly different approach to that taken in England, to the interpretation of the payment provisions of the Housing Grants Act.

It will be recalled that the sharp issue for the Court to determine was whether, following determination of a JCT Standard Form of Building Contract (1998 Edition) after an insolvency event, the provisions of clause 27 (which delayed any further payments to the contractor until the works are complete and the accounts are balanced), prevented the contractor enforcing payment of certified sums where the final date for payment had passed, but where there was no notice of intention to withhold payment. In other words, whether the provisions of section 111 of the 1996 Act trumped the mechanism in clause 27 of the contract.

At first instance, Lord Clarke sought to categorise the matter as an issue of freedom of contract. He found that the mechanism in clause 27 was effectively an agreement between parties to postpone the final date for payment. He also stated that the legislative provisions of the 1996 Act were not intended to regulate ‘that situation’ where ‘the contract is legitimately determined by the employer’ under clause 27. This decision raised various serious questions regarding the effects of determination on payment and the ability of parties to ‘contract out’ of the1996 Act in general.Why would the freedom of contract argument apply only to these facts? What about the other provisions of the Act? The decision was also difficult to reconcile with cases such as The Ferson Contractors Ltd v Levolux and The Construction Centre Group v Highland Council where the courts enforced the adjudication awards despite provisions in the contracts purporting to specify that no further sums could be paid after determination of the contract.

The decision of Lord Clarke was appealed, and on 15 December 2005 it was overturned by an Extra Division of the Court of Session.

Delivering the Opinion of the Court, Lord Nimmo Smith first considered whether Lord Clarke was correct to hold that the provisions of the 1996 Act did not apply. The Court found that the Act did apply, observing that it was merely the contractor's employment under the contract that was determined, not the contract itself. In various respects, the contract continued to govern the relationship between parties - not least under clause 27 itself.

Having determined that issue, the Court then turned to the apparent conflict between clause 27 of the contract and section 111(1) of the 1996 Act. It proceeded on the assumption that, but for section 111, there could be no argument that the employer was not entitled to withhold payment.

The Court noted that the sums in dispute had fallen finally due for payment on 16 May 2003 and that at any time between then and the determination of the contract on 30 May 2003, the contractor could have enforced payment. Against that background the Court commented that even in the absence of section 111, it would require a very clear provision to retrospectively alter the final date for payment and deprive the contractor of its right to be paid.

Lord Nimmo Smith considered that rather than postpone the date for payment, the true effect of clause 27 was to permit the employer to withhold, in certain circumstances, a sum which was otherwise due for payment. That being the case, sections 109 to 111 of the Act continued to apply. Therefore, if the employer wished to withhold payment, he required to serve a Notice of Intention to Withhold payment.

Finally, the Court noted that this conclusion was consistent with the cash flow purposes of the 1996 Act and that in an insolvency situation, where there would never be enough money to go around, it was clear that Parliament had intended that inevitable losses would be borne by the employer. The decision offers much needed clarity in respect of the interaction of clause 27 and section 111. It also removes the apparent tension between the approach of the Courts to the Adjudication provisions of the 1996 Act on the one hand, and the payment provisions on the other.