UK: Contract Versus Statute

Last Updated: 29 January 2008
Article by David Thomas QC

The adjudication regime instituted by the Housing Grants Construction and Regeneration Act (HGCRA) has been in place in the UK construction industry for almost a decade now. Since then, comparable although generally more restricted adjudication provisions have been enacted in Singapore, New Zealand and Australian jurisdictions.

One of the key issues which has exercised the Courts in Britain has been the extent to which the freedom of the parties to a construction contract to agree as they wish has been restricted by statutory requirement and specifically what happens when there is, or appears to be, a conflict between contract and statute.

The Courts of both Scotland and England have again had to tackle this area of conflict in the last few months in the cases of Melville Dundas Ltd v George Wimpey UK Ltd, and Pierce Design International Ltd v Johnston, both on the question of the legality of the client/owner's withholding of interim payments.

The concept of the paramountcy of the statute had already been upheld in payment cases in the English Courts, where the question had been whether deductions could be made, without a valid statutory withholding notice, from the sum awarded by an adjudicator, where the contract states that they could be. The Court of Appeal in Levolux AT Ltd v Ferson Contractors in January 2003, disapproving the earlier first instance decision of Bovis Lend Lease v Triangle Developments, had endorsed the paramountcy of statute over contract in the context of the question whether deductions could be made from an amount awarded by an adjudicator's decision, if the contract said they could be:

"The contract must be construed so as to give effect to the intention of Parliament rather than to defect it. If that cannot be achieved by way of construction then the offending clause must be struck down."

Melville Dundas, a Scottish case, is a landmark in being the first on the payment provisions of the HGCR Act to reach the highest appellate level. The employer, Wimpey, had entered into a standard form design and build contract for a housing development with contractor Melville Dundas. When Wimpey failed to pay an interim certificate, the contractor's bank called in administrative receivers. Relying on its contractual remedy in the event of appointment of a receiver for the contractor, Wimpey terminated the contract.

In refusing to make the interim payment due, Wimpey relied upon a contractual provision to the effect that after termination "the provisions of this contract which require any further payment or any release or further release of retention to the contractor shall not apply." The issue for the court was whether this contractual provision was invalidated by Sections 109 and 110 of the HGCR Act, requiring that there must be entitlement to interim payments.

The result can be seen as a major step in the direction of contractual freedom, within the constraints of the Act. The House of Lords held that there was actually no conflict between the contractual provision and the statutory requirement, despite the appearance. The object of the statute was to introduce clarity and certainty to the contents of construction contracts, not to dictate to the industry what those contents should be. As Lord Hope put it "The parties' freedom of contract as to the circumstances in which the contractor's employment may be terminated and, if so, with what consequences, has not been affected."

Pierce Design International v Johnston in July 2007 provided a very early opportunity, only four months on, of considering the implications of Melville Dundas and indeed its limitations. Here the employers withheld payment not for insolvency but on the grounds of alleged contractor default. His Honour Judge Coulson noted that "the decision in Melville Dundas had "excited much comment in the world of construction adjudication. There is a fear that, taken to its logical conclusion, the decision might allow an employer to refuse to pay the sums due under the contract and then determine the contractor's employment at the last moment."

Nevertheless, he proposed to apply Melville Dundas in holding that the contract provisions were not repugnant to the Act.

However, this was not an end of the matter. Under the statute, a valid withholding notice was required. If the employer had not served such a notice and had refused to pay sums owed, that would be an unreasonable non-payment. Judge Coulson was satisfied that this had the "benefit of meeting head-one many of the concerns which have been expressed about the approach adopted in Melville Dundas to the effect that the decision might allow an unscrupulous employer to use determination as a way of avoiding responsibility to make interim payments".

Any statutory regime which contains requirements which must be satisfied in all contracts within the ambit of the Act, necessarily involves some restriction of freedom of contract. In Melville Dundas, the House of Lords appeared to provide a measure of flexibility for contractual arrangement on insolvency terminations. Pierce Design v Johnston is a reminder that this has not neutralised the statute and that it is unlikely that the last shot has been fired in this fundamental conflict.

First published in Construction Law International, December 2007

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

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