House of Lords
Published May 8, 2007
Melville Dundas Ltd and Others v George Wimpey UK Ltd and Others
Before Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe,
Lord Mance and Lord Neuberger of Abbotsbury
Speeches April 25, 2007
A provision that a party to a construction contract could not, unless he had
given notice of intention to do so, withhold payment after the final date
for payment of a sum due under the contract, did not apply to a lawful
ground for withholding payment, such as the contractor going into
receivership, when it was not possible for notice to have been given within
the statutory time frame.
The House of Lords so held, Lord Mance and Lord Neuberger dissenting, when
allowing an appeal by the defender employer, George Wimpey UK Ltd, and the
third party, Norwich Union Insurance Ltd, from an interlocutor of the Extra
Division of the Inner House of the Court of Session (Lord Nimmo Smith, Lord
Mackay of Drumadoon and Lord Maclean) (2006 SLT 95) allowing a reclaiming
motion by the pursuer contractor, Melville Dundas Ltd, and its receivers,
Colin Peter Dempster and Thomas Merchant Burton, from the interlocutor of
the Lord Ordinary (Lord Clarke) (2005 SLT 24) that the pursuers were not
entitled to claim payment of £396,630 allegedly due under a construction
contract.
Mr Robert Akenhead, QC and Mr Sean Smith, of the Scots Bar,
for Wimpey; Mr Robert Howie, QC and Mr Jonathan Lake, both
of the Scots Bar, for Melville Dundas.
LORD HOFFMANN said that the contract was for the construction of a housing
development in Whitecraigs, Glasgow, for a total sum of £7,088,270.
The contract incorporated the conditions of JCT Standard Form of Building
Contract with Contractor’s Design (1998 edition) which provided for monthly
applications for interim payments, and the final date for payment of the
amount due in an interim payment was 14 days after receipt by the employer
of the application.
On May 2, 2003 the contractor applied for an interim payment of £396,630 and
the final date for payment was May 16. The employer did not pay on that date
and on May 22 administrative receivers of the contractor were appointed by
its bank.
Clause 27.3.4 of the contract provided that if the contractor had an
administrative receiver appointed, the employer might determine the
employment of the contractor. The employer exercised that right on May 30,
2003.
That brought into effect clause 27.6.5.1 which stated that the provisions of
the contract which required any further payment to the contractor should not
apply, but that clause should not be construed so as to prevent the
enforcement by the contractor of any rights under the contract in respect of
amounts properly due to be paid by the employer to the contractor which the
employer had unreasonably not paid and which, where clause 27.3.4 applied,
had accrued 28 days or more before the date when under clause 27.3.4 the
employer could first give notice to determine the contractor’s employment.
His Lordship said that “require any further payment” meant “require the
employer to pay any more money”.
The next question was whether the effect of clause 27.6.5.1 was invalidated by
the Housing Grants, Construction and Regeneration Act 1996.
The effect of clause 27.6.5.1 was to disentitle a contractor from being paid
an instalment to which, until determination under clause 27.3.4, he would
have been entitled under the contract. Was there anything in the 1996 Act
which said that the contract could not so provide?
It was apparent from sections 109 to 110(1) of the 1996 Act that their object
was to introduce clarity and certainty as to the terms of a construction
contract rather than to dictate to the industry what those terms should be.
The only substantive requirement was that the contractor should be entitled to
payment by instalments and that there should be an adequate mechanism for
determining what he was entitled to be paid and when. The statute went no
further.
Instalment payments were in their nature provisional liabilities. They were to
provide the cash flow for the contractor or subcontractor to enable him to
perform his duties under the contract.
But when the contractor’s employment had been determined in consequence of the
appointment of a receiver, two consequences followed: first the contractor
had no longer any duties to perform; second, the liability to make an
interim payment was no longer provisional.
While the employer retained the money, he could set it off against his
cross-claim for noncompletion against the contractor. In practice, where the
contractor had become insolvent, the employer would have a cross-claim for
damages which exceeded the contractor’s claim for unpaid work.
On the other hand, once the employer had paid the money it was gone. It was
swept up by the bank’s floating charge and the employer would have to prove
in the liquidation for his cross-claim.
Upon insolvency, liability to make an interim payment therefore became a
matter which related not to cash flow but to the substantive rights of the
employer on the one hand and the contractor’s secured or unsecured creditors
on the other.
A provision such as clause 27.6.5.1, which gave the employer a limited right
to retain funds by way of security for his cross-claims, seemed a reasonable
compromise between discouraging employers from retaining interim payments
against the possibility that a contractor who was performing the contract
might become insolvent at some future date, which might well be
self-fulfilling, and allowing the interim payment system to be used for a
purpose for which it was never intended, namely, to improve the position of
an insolvent contractor’s secured or unsecured creditors against the
employer.
The contractor also relied on section 111(1) of the 1996 Act and said that the
employer was not entitled to withhold the interim payment because it did not
serve a notice earlier than the prescribed period, which the JCT conditions
fixed at five days before the final date for payment on May 16, 2003.
It would not have been possible for the employer to serve such a notice by May
11. The earliest they could have been known that they were entitled to
withhold the interim payment was when the receivers were appointed on May
22. To make clause 27.6.5.1 subject to the notice requirement of section
111(1) would be in effect to write it out of the contract.
It would be absurd to impute to Parliament an intention to nullify clauses
like 27.6.5.1, not by express provision in the statute, but by the device of
providing a notice requirement with which the employer could never comply.
Section 111(1) had to be construed in a way which was compatible with the
operation of clause 27.6.5.1.
His Lordship would say lex non cogit ad impossibilia and that on that ground
section 111(1) should be construed as not applying to a lawful ground for
withholding payment of which it was in the nature of things not possible for
notice to have been given within the statutory time frame.
That might not be particularly elegant, but the alternative was to hold that
the parties’ substantive freedom of contract had been indirectly curtailed
by a mere piece of machinery, the operation of which would serve no
practical purpose. That was even less attractive.
Lord Hope delivered a concurring speech and Lord Walker agreed with Lord
Hoffmann. Lord Mance and Lord Neuberger delivered dissenting speeches.
Solicitors: MacRoberts, Glasgow; Maclay Murray & Spens,
Edinburgh.
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