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CHAPTER 5: FURTHER ISSUE FOR CONSIDERATION AS PART OF THIS CONSULTATION.
The judgement of the House of Lords in Melville Dundas -v- George Wimpey
Background
This judgement relates to a Scottish case but it is likely to be followed across the UK, as it concerns the interpretation of the Construction Act as it applies in England and Wales (and in similar legislation in Northern Ireland) as well as Scotland. It has since been referred to in the case of Pierce Design International Limited against Mark Johnston and another (EWHC1691) TCC)). We are seeking the views of consultees on:
- whether this House of Lords judgement raises issues which must be addressed via a legislative amendment; and,
- what options there are for addressing those issues.
The case
In the case, Wimpey employed Dundas to construct a housing development. On 2 May 2003, Dundas applied for an interim payment. There was no dispute that this payment was due. The final date for payment was 16 May (14 days after Dundas' application). On 30 May 2003, Wimpey terminated the contract due to the appointment of an administrative receiver to Dundas. The contract provided that where Wimpey terminated the contract it was not obliged to pay any payment due which accrued less than 28 days before the earliest date that Wimpey could have first given notice to terminate the contract (22 May).
Dundas sought to enforce the payment in the Outer House of the Court of Session (in Scotland) claiming that the payment ought to have been made on or before the final date for payment, notwithstanding the termination of the contract. No withholding notice had been issued in accordance with section 111 of the Construction Act before the 11 May contractual deadline. Lord Clarke refused to enforce the payment, stating that the payment had not been withheld but that the final date for payment had been delayed while a final payment following termination was calculated. This was overruled by the Inner House of the Court of Session (Appeal Court in Scotland). On 25 April 2007, by a majority of 3 to 2, the House of Lords restored Lord Clarke's original judgement, though for different reasons.
The judgement
The reasoning of the prevailing judgements in the House of Lords can be summarised as follows -
- The Construction Act is intended to balance the parties' freedom of contract with the need for clarity as to amounts of payments under the contract and any amounts to be withheld. This was intended to balance the interests of the payer and the payee.
- Section 111 should apply to interim payments where these become due by virtue of the statutory right to interim of stage payments in section 109 of the Act. So long as the contract is in operation, a notice would be required for these to be withheld via set-off as a result of a cross claim.
- It was not clear that section 111 applied to withholding under the standard determination clause in the contract because -
- The determination clause was already drafted in a standard contract so as to balance the interests of the payer and payee.
- It allowed the payment to be withheld in cases of administration in the same way as would apply under the legislative framework for cases of bankruptcy and liquidation.
- After the payment was withheld, a final payment would be determined taking into consideration all of the parties respective entitlements. The effect was that the interim payment that had been due was no longer due, and instead a final payment would become due.
- In the absence of clear provision in the Act, the Inner House should not have insisted on the payment being made, but should have found that the determination clause applied.
- The two dissenting Law Lords found that the only way to systematically apply the withholding notice requirement in the Act was to find, as the Inner House did, that, in the absence of a withholding notice, the determination clause did not apply. The Act did not provide an exception to the application of section 111.
Issues raised
The question is whether this decision was limited to circumstances of insolvency of the contractor and therefore whether, if there was no insolvency, section 111 applied to withholding under the determination clause. The decision in Pierce Design against Johnston and another considered the clause did not fall foul of Section 111 of the Act and that it either complied or it did not. There were no different interpretations dependent on the set of facts applying.
The consultation response form asks respondents whether:
- the Act should expressly provide an exception to section 111 in cases where the payee is insolvent (section 113 already provides an example of an exception for insolvency) or leave this exception to be decided by the court; and
- whether the Act should be amended to make clear that section 111 applies to all other grounds for withholding in respect of all payments".
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