UK: House Of Lords Rules For The First Time On The Housing Grants Act - Withholding Notices Not Required Following Determination Of Contract

The Background

Melville Dundas ('the Contractor') was engaged by Wimpey ('the Employer') to carry out a housing development subject to the Standard Form of Building Contract issued by the Scottish Building Contracts Committee incorporating the JCT Standard Form of Building Contract (1998 Edition). On 16 May 2003, the Contractor should have been paid the sum of approximately £400,000 by way of interim payment certified by the Employer's Agent, this being the final date for payment. No notice of intention to withhold payment had been served. On 22 May 2003 administrative receivers were appointed to the Contractor. On 30 May 2003 the Employer determined the employment of the Contractor and refused to pay the sum.

At first instance, the issue became one of an apparent conflict between clause 27 of the Contract and section 111 of the Act.

Clause 27 provides:

It was accepted that the date when the Employer could first have given notice to determine the employment of the Contractor was 22 May 2003. It was also accepted (at first instance and on appeal although not before the House of Lords - see below), that absent sections 109, 110 and 111 of the Act, there could be no argument that the Employer was not entitled to withhold payment.

The difficulty came in considering the words of section 111 of the Act which states that:

Lord Clarke took the view that there was no conflict between this section and the relevant part of clause 27 of the Contract. Section 111 was directed at cash flow during the course of a continuing contract and did not apply once the contract had been legitimately determined. He held that the section was not intended to subvert the parties' contractual arrangements, expressed in section 109(2) and 110(1) of the Act, the latter section providing that parties are free to agree how long the period is to be between the date on which a sum became due under the contract and the final date for payment. Clause 27 effectively postponed the final date for payment until the balancing up provided for under this clause had been concluded.

This decision was criticised at the time as effectively allowing parties to 'contract out' of the 1996 Act and on the grounds that it was in apparent conflict with other decisions then in existence such as Ferson Contractors Ltd v Levolux A.T Ltd and The Construction Centre Group v Highland Council where the courts enforced adjudication awards despite provisions in the contracts in those cases purporting to specify that no further sums could be paid after determination of the contract.

These factors, amongst others, were taken into account by the Scottish appeal court (the Inner House of the Court of Session) which on 15 December 2005, overturned Lord Clarke's decision. First, the appeal court held that the Act did apply even in a determination situation - it was the Contractor's employment which had come to an end, not the contract itself. Secondly, the Court considered the conflict between section 111(1) which required a notice of withholding if sums were to be withheld and clause 27 of the contract. The Court was influenced by the fact that the Contractor could have enforced payment at any time between 16 May 2003 and 30 May 2003 when the contract was determined. Even in the absence of section 111, it would require a very clear provision to retrospectively alter the final date for payment and deprive the Contractor of its right to be paid. Clause 27 did not postpone the final date for payment - rather it allowed the Employer to withhold sums which were otherwise due for payment, provided the provisions of sections 109 to 111 of the Act were complied with. In the absence of a notice of intention to withhold payment, the Employer was not permitted to do so.

This was how matters remained until the House of Lords issued its decision on 25 April 2007 following the appeal to it by the Employer, George Wimpey. The House of Lords, by a narrow majority of 3 to 2, overturned the decision of the Extra Division of the Court of Session, and reinstated Lord Clarke's first instance decision from October 2004.

There were two main issues which the House of Lords was asked to consider. First, the Lords reviewed the wording of the relevant part of clause 27 of the Contract. The Contractor took the position that the words within clause 27 restricting the requirement to make 'any further payment' where determination had occurred, only referred to future or further liabilities to make payment and did not affect the Employer's obligation to make payment of sums which had already accrued and were due for payment, prior to the date when notice of determination could first have been given, i.e. sums which were due for payment could not cease to be due. Their Lordships were unanimous in rejecting this contention on the basis that the clear intention of clause 27 was to restrict the Employer's obligation to make any further payment, whether accrued or not, in a determination situation, with the exception of sums which had accrued more than 28 days before the relevant date. The 28 day period had no meaning if the Contractor was correct that any sums which had accrued prior to determination had to be paid.

Thereafter the Lords had to consider the more difficult question of whether the intention of clause 27 was negated by the provisions of Part II of the Act, in particular sections 110 and 111 and the requirement to give notice of intention to withhold payments otherwise due for payment.

In considering this issue, all the judges who gave reasoned decisions looked in detail at sections 109-113 of the Act. Lord Hoffman in particular considered that section 109(2) of the Act had made it clear that parties 'are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due'. This could include a situation where a sum which had fallen due ceased to be due because of circumstances subsequently arising. This led His Lordship to consider issues surrounding insolvency and the right of an employer to retain sums otherwise due against any claim for damages that he may have as a result of the determination. Lord Hoffman disagreed that it was clear that Parliament had intended that in such an insolvency situation employers were to bear the risk (as the Inner House had determined). Clause 27 in his view struck a reasonable balance between all the parties affected by the insolvency. Ultimately however, Lord Hoffman's decision was heavily influenced by the fact that in the current situation, it would not have been possible for the Employer to serve the notice of intention to withhold payment on time, the event giving rise to the right to withhold payment (the appointment of receivers and subsequent determination) not having occurred until after the final date for payment:

This he did by determining that clause 111(1) should not apply to a lawful ground of withholding payment of which it was not possible for notice to have been given in the statutory timeframe, even though it was acknowledged that this reasoning was 'not particularly elegant'. To hold otherwise would be to curtail the parties' freedom of contract permitted by other sections of the Act.

In relation to this second issue, Lord Hope of Craighead also decided in Wimpey's favour although this he did by looking in some detail at the intention of Parliament in enacting sections 109 to 111 of the Act. He considered the terms of a consultation paper, Fair Construction Contracts, issued in 1995, upon which the 1996 Act was ultimately based. Issues concerning the consequences of the insolvency of one or other of the parties to a construction contract had been debated at length but there was no indication that there was thought to be any need to constrain or restrict the employer's right of set off in the event of the determination of the contractor's employment under the contract. In Lord Hope's opinion, taking a purposive approach, section 111(1) of the Act was designed to address the issue of withholding of payment without notice of stage payments or other periodic payments, not the withholding of sums already due in the event of the determination of the contractor's employment pending the balancing of accounts. He therefore agreed with Lord Clarke that section 111(1) does not apply to the situation where the employer wishes to exercise his set off rights under clause 27.

In a persuasive dissenting judgment, Lord Neuberger of Abbotsbury was of the opinion that as a matter of simple statutory interpretation, no withholding under clause 27 was possible if an effective notice of intention to withhold payment had not been served. In his view, it had been made clear that parties should not be permitted to contract out of the fundamental provisions of the Act, which included the requirement to give advance notice of any intention to withhold payment. He was not persuaded that a sum which was due under the contract (as the payment here was on 16 May 2003), could subsequently be rendered 'not due'. He could see no reason why section 111 did not equally apply when a contract had been determined, as the requirement to give a notice of withholding applied to any sums 'due under the contract' and there were still sums due for payment, even after the Contractor's employment had been determined. In stark contrast to the reasoning of Lord Hope, Lord Neuberger was of the view that if Parliament had intended that section 111(1) should not apply where the contractor had become insolvent, then this should have been expressly stated - there was no such express statement and accordingly the natural inference was that the provisions of section 111(1) continued to apply even in these circumstances. For all of these reasons, Lord Neuberger proposed to dismiss the appeal.

The fact that this case resulted in a split decision and only a narrow victory for the Employer, George Wimpey, shows the difficulty of the issues in dispute, which have to a large extent resulted from the inadequate drafting of the 1996 Act, not least in relation to the requirements to give notice of amounts to be paid and amounts withheld. Indeed several of the judges commented on the confusion created by sections 110(2) (payment notices) and 111(1) (withholding notices), and it is likely that this will add significant weight to the proposal that these sections be amended as part of the ongoing Construction Act review.

On a straightforward reading of the decision and the arguments put forward, the dissenting opinion of Lord Neuberger has much to commend it in terms of simplicity and straightforward intent of Parliament. By their own admission, the reasoning given by their Lordships who allowed the appeal, is awkward and requires reading into the Act meaning which is not apparent on the face of it. Nevertheless, this decision is final and will stand to regulate the rights and obligations of employers and contractors when an event has arisen which has given rise to a determination under Clause 27 of the JCT standard form contract. In these circumstances, the employer's contractual protection is preserved and it will be unnecessary for employers to serve a notice of intention to withhold payment.

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