Insolvency And Payment Under The Construction Act: The House Of Lords Finally Decides

The Facts

Melville Dundas Limited (in Receivership) v George Wimpey UK Limited and Norwich Union Insurance Limited [2007] UKHL 18 is a case about a contractor, (MD), which was employed by housebuilder George Wimpey UK Limited (GWUK) in respect of a housing development in Glasgow.† The contractor entered into a construction contract valued at approximately £700,000 on 20 March 2002. The contract incorporated the terms of the JCT Standard Form of Building Contract With Contractor's Design 1998 Edition, amended to suit use in Scotland.† Although the contract was governed by Scottish law, the relevant provisions argued in this case were JCT provisions which were unaffected by the Scottish Supplement to the contract, so the decision in this case does not turn on peculiarly Scottish provisions of contract.

The Housing, Grants, Construction and Regeneration Act 1996, commonly known as the Construction Act, applies to Scottish construction contracts. Therefore, the contract provided for monthly applications for interim payments and specified a final date for payment in respect of each interim amount due of 14 days after receipt by GWUK of the application.

On 2 May 2003, MD lodged an interim application for payment. GWUK should have paid MD the amount due on or before 16 May 2003. It didn't. Nor did GWUK serve a withholding notice to MD in accordance with section 111 of the Construction Act, identifying the sum being withheld from payment. On 22 May 2003, MD went into administrative receivership.

The JCT provisions provided that GWUK could terminate MD's employment under the contract if an administrative receiver was appointed. GWUK exercised this right on 30 May 2003. Termination brought into effect clause 27.6.5.1 of the contract which provided as follows:

"Subject to clauses 27.5.3 and 27.6.5.2 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 clause 27.6.5.1 shall not be construed so 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, where clause 27.3.4 applies, have accrued 28 days or more before the date when under clause 27.3.4 the Employer could first give notice to determine the employment of the Contractor or, where clause 27.3.4 does not apply, which have accrued 28 days or more before the date of determination of the employment of the Contractor".

The administrative receivers made a demand for payment to GWUK for £396,630.00. GWUK refused to pay on the grounds that, they argued, clause 27.6.5.1 provided that following termination of MD's employment, the provisions of the contract requiring further payments to be made no longer applied, with the exception of amounts accrued 28 days or more before the date the employer could have first given notice of determination or the date of determination itself (as applicable).† GWUK argued that as the payment claimed was inside of the 28 days period, clause 27.6.5.1 prevented MD from demanding payment. It was further argued that where the contractor's employment was determined, a balancing exercise would be carried out to arrive at sums due to the contractor by the employer or to the employer by the contractor, as the case may be, following the employer's right to pay others to purchase materials and goods necessary to complete the works, physically complete the works and make good defects.

MD argued that the effect of the statutory provisions in the Construction Act altered that position in favour of MD's claim. As a result, clause 27 operated as a suspension of payment until the balancing exercise and setting off of cross-claims had been undertaken.† Thus a scheme for withholding payment was, in effect, provided.† As GWUK had not served the requisite notice of its intention to withhold...