Circumstances change cases

Circumstances … that’s an awfully big word. It looms large in the first Construction Act case to come to the House of Lords since we were given the act back in 1998. The case is Melville Dundas vs George Wimpey.

Do you remember those 1998 circumstances? Instead of being canny, instead of showing shrewdness and good judgment about paying contractors, one or two folk thought it was terribly smart to impose damn awful payment terms on the other bloke.

“Well,” said some, “that’s what’s called freedom of contract.”

“No, no,” said others, “it’s called ‘oppressive bargaining power’.”

Anyway, the circumstances proved too embarrassing, especially when Sir Michael Latham’s Constructing the Team reported to parliament. The then Department of the Environment (DOE) neatly explained the “circumstances” in a 1995 paper to parliament called Fair Construction Contracts. It was mentioned in this 2007 House of Lords judgment.

Credit: Simone Lia

“As Buddha said ‘Everything changes, nothing remains unchanged.’ ”

“Yes but Buddha does owe me a large wad of money.”

The DOE urged that “certain essential terms may not be omitted or substantially varied”. These being (1) dispute resolution, (2) right of set-off, (3) prompt payment, (4) protection against insolvency. The paper also recommended a provision by parliament for “a clearly defined period … within which interim payments must be made” and “that any attempt to amend or delete” such a provision “should be invalid”.

The law-making machine whirred and whooshed. There was a balance to be struck between making people play fair, pay fair, and “freedom of contract”. A key payment rule came into the act. It said: “The parties are free to agree the amount and interval at which, and circumstances in which, payments become due.”

Now then, that’s harmless isn’t it? True, the act does demand that the payer tell the payee what is to be paid; true the payer can’t withhold from a sum that has “become due” unless a “withholding notice” is issued in good time. And in the nine years of operating all this, two things are clear: (1) everyone knows about the “withholding notice”, and (2) few understand what is meant when money “becomes due”.

Let’s be clear. So long as there are interim payments and they are commercially realistic enough to fund the progress of the works, it is open to the parties to agree intervals for the cheques, and open to the parties to agree the circumstances in which the money becomes due or doesn’t become due.

In the JCT contract forms for example, the circumstance is the amount on the architect’s monthly certificate. It is beside the point that the amount is too much, or too little; the money due is the amount on the paper. So becoming due”is a circumstance, not a truth or evidence of correctly evaluating the work. Dear me, no!

Melville Dundas was built houses for Wimpey. Wimpey paid up on each certificate. A lump more money had become due and was to be paid on 16 May. But then administrative receivers were appointed to the builder.

So Wimpey held on to the lump of money that had become due according to the certificate. That’s because a rule in the JCT contract requires no further payments on the occurrence of such receivership.

Ah, said the builder in receivership, you can’t withhold any money because no “withholding notice” was issued before the final date for payment. Nine judges later, the House of Lords ruled that a withholding notice was not required, so Wimpey does not pay.

The judges wrestled with the notion that if the payment certificate made the money due then the receivership rule made it undue. It was, by the time of receivership, too late to serve the withholding notice. So the majority of judges ruled that if it was impossible to serve a withholding notice then in those circumstances (big word) the rule about a withholding notice didn’t apply. Inelegant admitted one judge.

For me, the amount that “becomes due” was first the certified sum, then circumstances arose that made that sum no longer due. And once nothing has become due, no withholding notice applies. The answer was all in the circumstances … an awfully big word.