Melville Dundas Limited (in receivership) v George Wimpey UK Ltd

In the event of an insolvency event under clause 27 of the JCT '98 WCD Standard Form the contractor's employment could be determined but the underlying contract would remain in force. Where an employer has failed to serve a valid withholding notice against sums due to the contractor before the contractor's determination under clause 27, section 111 continues to apply and the sums due to the contractor must be paid immediately. Even if it were permitted by the HGCRA '96, express words would be needed to retrospectively postpone the final date for payment and thereby deprive a contractor of sums already due to him under the contract. There were no such words in clause 27.

Lord Nimmo Smith, Lord Mackay of Drumadoon & Lord MacLean

Extra Division, Inner House, Court of Session

15 December 2005

The Extra Division of the Court of Session has overturned the controversial decision of the Court of Session regarding the interaction of section 111 of the HGCRA 1996 and clause 27 of the JCT Standard Form of Building Contract (1998 Edition) which (broadly) provides that following a determination of the Contractor's employment for an insolvency event, future payments to the Contractor shall be delayed until the works are complete and the accounts finalised.

Melville Dundas Limited ("MDL") were employed by George Wimpey UK Limited ("GWL") to design and build a housing development. The Contract was on the Scottish standard form of building Contract incorporating the provisions of JCT '98 With Contractor's Design (with amendments).

MDL made an application for payment on 2 May 2003. This was valued and certified on behalf of GWL on the same day at £396,630. MDL, in accordance with the Contract, issued an invoice to GWL. Under the relevant payment provisions of the Contract, that sum became due for payment on 2 May 2003 and the final date for payment was 16 May 2003. No notice of withholding was served in respect of the £396,630 by the contractual date for doing so. GWL failed to pay the invoiced sums to MDL. On 22 May 2003, MDL had receivers appointed to them. GWL, as they were entitled to do in such circumstances, determined the Contract on 30 May 2003. How did these events alter the position regarding payment of the £396,630?

Clause 27 of the Contract provided that from the date when the GWL was first entitled to determine the Contract (in this case the date the receivers were appointed – 22 May 2003), GWL were not bound by any provisions of the Contract to make any further payment thereunder. The Contract also provided that in the circumstances, the provisions of the Contract which required further payment to MDL would not apply, except in respect of amounts which had accrued to MDL 28 days or more before 22 May. In other words, under clause 27, MDL was not entitled to payment of the £396,630 because it had accrued within the 28-day period leading up to 22 May.

MDL and its receivers argued that these provisions of the Contract were at odds with section 111 of the HGCRA 1996 and should be struck down. Section 111 provides:- "A party to a construction Contract may not withhold payment after the final date for payment of a sum due under the Contract unless he has given an effective notice of intention to withhold payment…". In seeking to withhold payment of the £396,630, GWL were in effect creating a security fund to protect them in the light of MDL's insolvency. The right to do so had, however, been fettered by section 111 of the Act.

GWL argued that section 109 of the HGCRA 1996 left it to the parties to decide what sums were due under a Contract and in what circumstances. Here the parties had agreed that if a receiver was appointed to MDL and its employment was determined as a result, then the only sums remaining due and payable to MDL thereafter were those which had accrued more than 28 days prior to the appointment of the receiver. A balancing exercise had to be carried out to arrive at the sums which would become due to MDL from GWL or vice versa as the case may be in the future. Such an agreement was not struck down by section 111.

At first instance, Lord Clarke decided in favour of GWL. He found that section 111 was directed at "cash-flow questions, arising during the course of a continuing, non-determined construction Contract". The legislative provisions were not intended to regulate the situation where the Contractor had become insolvent and the Contract had been determined as a result. Accordingly, the HGCRA no longer applied. Instead, the parties were free to agree, as they had done, that the original date for payment of sums due under the Contract could be altered in the event of the Contract being determined upon the Contractor's insolvency.

Lord Clarke's decision was appealed and overturned by the Extra Division of the Court of Session. Lord Nimmo Smith delivered the Opinion of the Court. He held that Clause 27 did not provide for a determination of the Contract, it provided for the determination of the Contractor's employment under the Contract and that the Contract would remain in force and regulate the rights and obligations of the Contractor and the Employer after that event. The Lords bore in mind that section 111 is a provision about cash flow, and proceeded on the assumption that without section 111 the Employer would be entitled to withhold monies. The Lords noted that it was not in dispute that the final date for payment of the sums sued for was 16 May 2003, thereafter the sum was overdue and MDL could have taken immediate steps to enforce payment from that date. The Lords held that, even if the statute permitted it, it would require very clear words in the Contract to retrospectively alter the final date for payment and thereby deprive MDL of a right that had already accrued to enforce payment. There was no such express provision in the Contract.

The provisions of the Contract purported to permit the Employer to withhold in certain circumstances after the final date for payment, but not to retrospectively alter the final date for payment. Sections 109 to 111 continued to apply and if GWL wished to withhold payment then it had to serve a valid withholding notice within the time limits expressed in the Contract. The Court concluded by stating that, inevitably, where a Contractor becomes insolvent there is a risk that there will not be enough money to go round and losses will have to be borne. In circumstances such as this, the losses would be borne by the Employer under the Contract, hence the provisions of section 111.