Melville Dundas Limited (in receivership) and others (Respondents) v. George Wimpey UK Limited and others (Appellants) (Scotland)

A construction contract may provide that an accrued interim payment ceases temporarily to be payable when the contractor’s employment is determined following the appointment of an administrative receiver. Sections 109 and 110 of the Housing Grants, Construction and Regeneration Act 1996 preserve substantial freedom to define the circumstances governing instalment payments.

By a majority, the House held that section 111(1) did not prevent reliance on such a provision where the contractual ground for withholding arose only after the statutory deadline for a withholding notice. The statutory payment machinery should not be construed to require an impossible notice or to remove agreed insolvency protection without express provision. A contractual arrangement which effectively denies the statutory entitlement to instalment payments may nevertheless be invalid.

A contractor applied for an interim payment of £396,630 under a construction contract incorporating the JCT Standard Form of Building Contract with Contractor’s Design 1998. The final date for payment passed without payment or a withholding notice. Six days later, administrative receivers were appointed, and the employer subsequently determined the contractor’s employment.

Clause 27.6.5.1 suspended further payments following determination, subject to limited protection for older amounts which had been unreasonably unpaid. The Lord Ordinary held that the employer could rely on the clause: 2005 SLT 24. The Extra Division reversed that decision, holding that the clause conflicted with section 111 of the Housing Grants, Construction and Regeneration Act 1996: [2006] SLT 95.

The issues were whether the clause covered an interim payment whose final date had already passed and, if so, whether section 111(1) prevented the employer from relying upon it without a timely withholding notice.

1. Appeal allowed by a majority of three to two. Lord Hoffmann and Lord Hope of Craighead delivered the principal majority opinions. Lord Walker of Gestingthorpe agreed fully with Lord Hoffmann. Lord Mance and Lord Neuberger of Abbotsbury dissented.

2. Construction of the contract. All members of the House agreed that clause 27.6.5.1 applied to the accrued interim payment. Per Lord Hoffmann and Lord Hope, the unqualified words “any further payment” prevented the contractor from requiring the employer to pay any more money pending the contractual account. A construction confined to liabilities arising after determination would deprive the proviso concerning amounts already properly due of practical effect.

3. Statutory entitlement to instalments. Per Lord Hoffmann, with Lord Walker agreeing, sections 109 and 110(1) of the Housing Grants, Construction and Regeneration Act 1996 principally require an entitlement to instalments and an adequate mechanism for determining what is payable and when. Section 109(2) permits the parties to define the circumstances governing payment. A sufficiently certain contingency may therefore cause an accrued interim liability to cease to be payable. The clause was a reasonable, limited protection for an employer’s cross-claims following the contractor’s insolvency-related determination. It did not deny the statutory entitlement to instalments altogether.

4. Section 111(1). Per Lord Hoffmann, section 111(1) could not require a withholding notice where the relevant lawful ground arose only after the last date on which notice could have been served. The law does not compel the impossible. Construing the payment machinery otherwise would indirectly eliminate a lawful substantive contractual provision and serve no practical notice function. Lord Hope reached the same result through a purposive construction: section 111 addressed withholding from ordinary stage payments, rather than retention following determination pending an account of the parties’ substantive rights.

5. Dissent. Lord Mance and Lord Neuberger considered section 111(1) clear and unqualified. Once the final date passed without an effective notice, the employer could not withhold payment. In their view, implying an exception for later-arising grounds would undermine the statutory certainty and cash-flow regime.

6. The Extra Division’s interlocutor was recalled, the Lord Ordinary’s interlocutor was restored, and the action was dismissed.

1. House of Lords: By a majority of three to two, allowed the employer’s appeal, recalled the Extra Division’s interlocutor, restored the Lord Ordinary’s interlocutor and dismissed the action: [2007] UKHL 18.
2. Inner House of the Court of Session, Extra Division: Held that clause 27.6.5.1 conflicted with section 111 of the Housing Grants, Construction and Regeneration Act 1996 and reversed the Lord Ordinary: [2006] SLT 95.
3. Outer House of the Court of Session: Lord Clarke held that section 111(1) did not prevent the employer from relying on clause 27.6.5.1: 2005 SLT 24.