J B Leadbitter & Co Ltd v Hygrove Holdings Ltd

Certified sums under a construction contract become payable on the contractual final date where no withholding notice has been served. A supplemental agreement cannot lawfully make payment conditional upon, or postpone payment until, receipt of money from a third party, unless the statutory insolvency exception applies. Such a provision is ineffective under section 113(1) of the Housing Grants Construction and Regeneration Act 1996. The payer must therefore pay the certified sum even if it has not received corresponding funds from elsewhere in the contractual chain. A short stay of execution may exceptionally be granted, but the statutory policy of maintaining cash flow means that enforcement of sums payable under the contractual mechanism should not ordinarily be delayed.

Leadbitter sought summary judgment against Hygrove for unpaid sums certified under two JCT Design and Build contracts. No withholding notices had been served, and the certified amounts totalled £196,267.

Hygrove relied on a tripartite Supplemental Agreement establishing an escrow account. It argued that payment to Leadbitter was conditional upon, or postponed until, Coastal Housing Group Ltd paying sufficient sums into that account. Hygrove also relied on alleged errors in the account’s administration, including an admitted over-retention of £28,331.

The central issue was whether the Supplemental Agreement lawfully postponed Hygrove’s obligation to pay Leadbitter.

1. Judgment for the claimant. The certified sums were due and payable on the relevant final dates because certificates had been issued and no withholding notices had been served. The court relied on Rupert Morgan Building Services (LLC) Ltd v David & Harriet Jervis [2004] BLR 18.
2. Clause 2.12 of the Supplemental Agreement was ineffective under section 113(1) of the Housing Grants Construction and Regeneration Act 1996 insofar as it made, or purported to postpone, payment conditional on Coastal paying sufficient money into the escrow account. The Supplemental Agreement expressly formed part of the construction contracts, and neither statutory exception applied: there was no relevant insolvency and the development was not a PFI contract.
3. The reasoning in Midland Expressway Ltd v Carillian Construction Ltd [2005] EWHC 2963 (TCC) was applied. A contractual mechanism which postponed a subcontractor’s entitlement to payment until matters concerning payment or valuation under a head contract had been resolved could not evade section 113(1).
4. Any underpayment by Coastal, accounting uncertainty, or erroneous retention by Hugh James was no defence to Leadbitter’s claim. Hygrove had funds available to pay and could pursue Coastal separately. The admitted over-retention of £28,331 was to be released to Leadbitter pursuant to a joint instruction.
5. In the unusual circumstances, execution of the judgment, apart from the £28,331, was stayed for 21 days. The court emphasised that stays delaying payment under a construction contract should be avoided where possible because the statutory scheme is intended to maintain cash flow.