Melville Dundas (in receivership) –v- Wimpey
This is an important new case on payment provisions and, in particular, supply chain insolvency. It is the first House of Lords decision on the 1996 Construction Act.
Wimpey did not pay the sum due to Melville Dundas before the final date for payment. Nor did they serve a withholding notice. However, when Melville Dundas then went into receivership, Wimpey determined their employment and relied on the JCT provisions halting payment on determination.
There is a tension between the JCT conditions and the Act:
Clause 27.6.5.1
…the provisions of this contract which require any further payment…to the contractor shall not apply…[except in relation to sums which were due to be paid more than 28 days before determination]
Section 111(1)
A party to a construction contract may not withhold payment after the final date for payment of a sum due…unless he has given an effective notice of intention to withhold payment.
The focus of the decision is this: to take advantage of the contract, does the paying party also have to give a withholding notice on time?
The Scottish Court of Session, on appeal, decided that the provisions of the Act were sacrosanct, and that a withholding notice had to be given for the determination provisions to be effective.
The House of Lords reversed that: the contract was clear that – on determination and at least where it was not possible to issue a withholding notice in time – no further sums were to be paid (until the post-PC accounting). The Act allowed the parties to agree what sums became due and when, and the contract did that. It did not matter that the sums had already become due and payable before the determination. The purpose of the Act was not to divert funds into the receivership; it was to aid cashflow and certainty.
Practice Points:
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It may be worth refining your downstream contracts so as to make explicit that insolvency freezes the payment cycle.
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If your downstream contractor goes bust, determination is a very powerful way of protecting your company against irreversible commercial exposure to the receivers/ liquidators. That is especially so if (1) a withholding notice was served on time or (2) the withholding notice date had passed before insolvency, such that it was impossible to serve that notice.
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If it is still possible to serve a withholding notice, then it is prudent to do so (and may well be required).
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If the date for withholding has passed, determination may still allow you to refrain from paying sums that were due.
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Ultimately, it may still be possible to off-set sums due to you (such as the additional cost to complete with an alternative contractor) against a sum otherwise due. The House of Lords made certain comments that encourage the view that construction contracts are no different to other contracts in that insolvency balancing act.
For further information on this briefing, please contact:
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Vivien Welsh Senior Solicitor Construction & Engineering Team Tel. 0131 777 7098 vivien.welsh@mcgrigors.com |
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