Freedom of Contract and the Right to Payment After Determination

Originally published November 2004

In a surprising decision the Court of Session in Scotland in the case of Melville Dundas Limited v George Wimpey UK Limited (and another) [22 October 2004] has underlined the fundamental freedom of contract, which parties to a construction contract enjoy, to agree the final date when sums due under the contract become payable. This newsflash identifies a perceived tension between this decision and previous Appeal Court decisions in Scotland and England. Continued on reverse

The factual background

Melville Dundas ("the Contractor") was engaged by Wimpey ("the Employer") to carry out a housing development subject to the Standard Form of Building Contract issued by the Scottish Building Contracts Committee. This contract incorporates, subject to certain amendments, the JCT Standard Form of Building Contract (1998 Edition). It was accepted by the parties that the Contractor had received a Valuation from the Employer's agent in respect of an interim application in the sum of circa 400,000. It was accepted by the Employer that no valid notice of withholding had been issued. It was therefore accepted by the Employer that, everything else being equal, the sum of 400,000 was due to have been paid to the Contractor no later than 16 May 2003, the final date for payment.

It was also a matter of agreement between the parties that as at 22 May 2003, an insolvency event occurred, namely, Melville Dundas had receivers appointed.

The contractual provisions

It was provided that, as is common to many standard forms, in the event of insolvency, payment obligations are suspended until the Employer has completed the works and a balancing of accounts is carried out. Specifically, in Clause 27, it was provided:

" [on the occurrence of an insolvency event] the provisions of this Contract which require any further payment or any release or further release of Retention to the Contractor shall not apply; provided that [this clause] shall not be construed as to prevent the enforcement by the Contractor of any rights under this Contract in respect of amounts properly due to be paid by the Employer to the Contractor which the Employer has unreasonably not paid and which have accrued 28 days or more before the date the Employer could first give notice to determine the employment of the Contractor."

It was a matter of agreement between the parties that the date when the Employer could first have given notice to determine the Employment of the Contractor was 22...