Melville Dundas Ltd v George Wimpey UK Ltd

The House considered whether clause 27.6.5.1 of the JCT Standard Form (1998) entitles an employer to withhold interim payments after determining the contractor's employment on grounds including insolvency, and whether that clause is inconsistent with Part II of the Housing Grants, Construction and Regeneration Act 1996 (in particular sections 109–111). The majority held that clause 27.6.5.1 is apt to suspend the contractor's entitlement to further payments pending the making up of accounts and that the statutory regime does not invalidate such a contractual provision. The House construed section 111(1) purposively so as not to require an impossible pre‑expiry notice where the ground for withholding (for example appointment of a receiver) could not have arisen before the final date for payment; accordingly section 111(1) did not nullify the contractual right to retain the interim payment in the circumstances of this case. The appeal was allowed and the interlocutor of the Lord Ordinary restored.

Background and parties.

The employer (George Wimpey UK Ltd) contracted with the contractor (Melville Dundas Ltd) under JCT Standard Form (1998) for a housing development. The contractor applied on 2 May 2003 for an interim payment (£396,630) which by clause 30.3.6 was payable no later than 14 days after application (final date 16 May 2003). The contractor did not receive payment; on 22 May 2003 administrative receivers were appointed over the contractor and on 30 May 2003 the employer exercised a contractual right to determine the contractor's employment, invoking clause 27.6.5.1 which in effect suspends any obligation to make "any further payment" pending account. The contractor sued for the interim payment.

Procedural history.

• The Lord Ordinary (Outer House) had decided in favour of the employer (restoring his interlocutor);
• The Inner House (Extra Division) held that clause 27.6.5.1 conflicted with the 1996 Act and gave judgment for the contractor ([2006] SLT 95);
• The matter came to the House of Lords by way of appeal.

Issues framed.

1. Constructional issue: whether clause 27.6.5.1 operates so as to suspend or extinguish a contractor's right to an interim payment which had already fallen due before determination;
2. Statutory issue: whether Part II of the Housing Grants, Construction and Regeneration Act 1996 (notably sections 109–111) invalidates or restricts the contractual clause, and in particular whether section 111(1)'s notice requirement prevents reliance on the clause where a withholding ground could not have been notified within the statutory notice period.

Court's reasoning and conclusion.

The majority analysed the language of clause 27.6.5.1 and concluded that "any further payment" plainly covered interim payments which would otherwise have been payable, subject to the limited contractual proviso protecting sums unreasonably withheld or already accrued long enough before the employer could have given notice. The House held that the statutory scheme in Part II was intended to secure clarity about entitlement to stage payments and notice procedures but was not intended to displace parties' substantive freedom to agree how losses and priorities should be handled on termination, nor to determine insolvency priorities between employers and contractor creditors. On section 111(1) the majority adopted a purposive construction: it would be absurd to interpret section 111(1) as invalidating contractual provisions whose operative ground for withholding could not, by nature, have been notified within the statutory period (lex non cogit ad impossibilia). Consequently, section 111(1) did not prevent the employer relying on clause 27.6.5.1 in the facts of this case. The appeal was allowed by a majority; two Law Lords would have dismissed the appeal on a strict reading of section 111(1).

Appeal allowed. The majority held that clause 27.6.5.1 of the JCT form is apt to suspend the contractor's entitlement to further payments on determination and that Part II of the 1996 Act, read purposively (in particular section 111(1)), does not invalidate the clause in circumstances where it was impossible to give the statutory notice before the final date for payment. The House therefore restored the Lord Ordinary's interlocutor and dismissed the action. (There were two dissenting judgments which would have given effect to a strict reading of section 111(1).)

Appeal from the Court of Session, Inner House (Extra Division) ([2006] SLT 95) following the Lord Ordinary in the Outer House ([2005] SLT 24). The Inner House had held clause 27.6.5.1 incompatible with Part II of the 1996 Act; the House of Lords allowed the employer's appeal and restored the Lord Ordinary's interlocutor.