The House of Lords’ ruling in the Melville Dundas case confused everybody about the Construction Act’s payment rules. Now the courts are trying to get things straight again

The Melville Dundas case excited interest as it was the first time that a Construction Act case had reached the House of Lords.

In that case, the law lords considered clause of the JCT1998 With Contractor’s Design contract. This provides that, after a contract has been ended owing to a default on the contractor’s part, the provisions which “require any further payment or any release … of any retention to the contractor shall not apply”. However, the clause also specifically states that this provision should not prevent the contractor receiving any payment that it is due and which the employer has “unreasonably not paid”.

In the Melville Dundas case, the first issue to be considered was whether the clause was contrary to section 111 of the Construction Act, which states: “A party to the construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given effective notice of intention to withhold payment.”

The lords decided that it was not parliament’s intention for section 111 to render such clauses as clause ineffective. Lord Hope concluded that the purpose of the clause as a whole is to prevent the contractor from claiming payment from the employer, unless this payment has been “unreasonably not paid”.

The second issue to be considered was whether the payment had been “unreasonably not paid”. In this case it was implied that, as the contractor had gone into liquidation, the employer was not acting unreasonably by not paying the money due, despite the fact that it had not issued a withholding notice. This proviso was not however specifically considered.

Some commentators concluded that the case was specific to contractor insolvency. Others interpreted it more widely, saying that the decision provided protection for the employer in cases where it would end up suffering delay and additional cost through no fault of its own as a result of ending a contractor’s employment. This rests on the basis that such a termination only takes place as a result of a serious breach of contract by the contractor.

Judge Coulson concluded that the Johnstons had no right to withhold the sums due to Pierce because they had not served withholding notices

The decision in Melville Dundas was cited for the first time in the case of Pierce Design International Limited and Mark and Deborah Johnston, in which judgment was given by Judge Coulson on 17 July 2007.

Pierce claimed money it was owed under its building contract for which no withholding notice had been served by the Johnstons. The contract (on the same terms as that in Melville Dundas) had been terminated as a result of Pierce’s failure to proceed with the works.

Pierce relied on two arguments to support its case. First that clause was contrary to section 111 of the Construction Act. It failed on this front. Judge Coulson stated that he was bound by the decision in Melville Dundas – the clause did not fall foul of section 111 of the act.

Pierce’s second argument was that, if clause was in accordance with the act, the sums it was due had been “unreasonably not paid” by the Johnstons as they had not issued the relevant withholding notices. The Johnstons argued that the decision in Melville Dundas meant no payment need be made, despite the absence of withholding notices.

In this case, Judge Coulson concluded that the Johnstons had no right to withhold the sums due to Pierce because they had not served withholding notices – they had therefore “unreasonably not paid” the contractor.

Judge Coulson’s judgment is likely to be welcomed by the industry, as it meets concerns that unscrupulous employers could use the Melville Dundas decision to terminate a contractor’s employment in order to avoid making payments. However it is difficult to reconcile it with the drafting of clause and suggests that its impact is limited to contractor insolvency only.