Judgment was delivered yesterday in Melville Dundas v Wimpey - the first case concerning the Construction Act to reach the House of Lords. The case considers whether the JCT provisions which suspend a contractor’s entitlement to payment in the event of insolvency fall foul of the Act. It also raises questions as to when a withholding may be made even though a valid withholding notice was not issued.

Background

  • Wimpey (as developer) entered into a contract with Melville Dundas (as contractor) for the construction of a housing development in Glasgow. The contract was a JCT Standard Form of Building Contract with Contractor’s Design (1998 ed).
  • Melville Dundas made several applications for payment. One payment application was for around £400K. A valid withholding notice was not issued by Wimpey in relation to that application. Ordinarily, the lack of a valid withholding notice would leave Melville Dundas entitled to payment of the full amount.
  • However, shortly after making the application for payment, Melville Dundas became insolvent. Wimpey then terminated the contract on the basis of Melville Dundas’ insolvency, and in reliance on clause 27.6 of the JCT 98 form refused to make any further payment.
  • Clause 27.6 of the JCT 98 form entitles a developer to terminate the contract in the event of contractor insolvency, and suspend payments pending a later final reckoning. (The corresponding provision of the JCT 05 form is clause 8.7). The purpose of clause 27.6 is to preserve the position of the developer in the event of the contractor becoming insolvent, so as to protect any right of abatement or cross-claim that the developer usually has due to the extra cost of arranging for others to complete the works (and other costs and losses).
  • It was contended by the contractor that clause 27.6 fell foul of the Construction Act because it purported to take away the contractor’s right to payment in circumstances where a valid withholding notice was not issued and money was therefore due. Was the contractor right?

Decision

By the barest of margins (3-2), the House of Lords held that clause 27.6 of the JCT 98 form was valid, and that it entitled the developer to suspend making any further payment to the contractor, notwithstanding that the developer had failed to issue a valid withholding notice.

  • The majority judges recognised the importance of the payment provisions of the Construction Act in providing a contractor with cash flow during the life of the project. But they said that cash flow considerations fell away when a contractor was insolvent, and the contract in question had been terminated.
  • It was said that where a ground for withholding payment arises after the last date for issuing a withholding notice, that ground may potentially be relied upon to resist payment even though a valid withholding notice was not issued in respect of that ground (or at all).

Implications

  • Does this case mean that money may be withheld even if a valid withholding notice was not issued? This case indicates that in some circumstances the answer is "yes", but outside of insolvency cases the position is unclear as to when this may be done.
  • On the face of things, when a project is running normally and a contractor is making interim applications for payment it would be expected that if circumstances arose after the date for issuing a withholding notice which would entitle the developer to withhold payment, those issues would be picked up in subsequent payment assessments. A failure to issue a valid withholding notice will still entitle a contractor to payment in full of the amount due.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 27/04/2007.