When a contractor went into receivership, Wimpey withheld a £400,000 payment, thereby starting a lengthy legal struggle over who owned the money …
On 22 May 2003, the receivers marched into the foyer of one of Scotland's major PFI contractors: Melville Dundas had fallen in the water. The ripples are still washing up the beaches of Edinburgh and Glasgow. A lot of people got wet. One of the projects that stopped dead that day, was a neat housing complex at Ayr Road, Whitecraigs. Melville Dundas was the design-and-build contractor for developer George Wimpey. And it so happens that a Wimpey cheque for £400,000 was just about to be posted to the contractor. The appearance of the receivers put a stop to that. It doesn't take too much guile to work out that hanging on to that £400,000 will help to get the Whitecraigs homes finished by a replacement builder.
So, the receivers came to court to try to get their money, armed with the JCT98 With Contractor's Design form. But try as they might, the judge would not budge. He accepted Wimpey's argument that the rules in the JCT allowed Wimpey to hold tight to that cash.
The document is pretty plain. It says, for all purposes, that when an event like a receivership happens the parties wait until the work is finished; then the account is reconciled. In short, ask how much extra it cost the developer to get everything done, then the developer pays over any balance from the pot of £400,000 in its hands. But if that £400,000 had already been paid to Melville Dundas and Wimpey was demanding payment for its extra costs, then Wimpey would have to stand in line with all the other unsecured creditors … although, I ought to let you in on a little secret: if Wimpey lost out by being an unsecured creditor it could have called in a Norwich Union bond for a lump of money.
Anyway, the receiver's lawyers decided to go to the Scottish Court of Appeal. The three judges here reversed the first judge. Wimpey ought not to have retained the money. It's all to do with the payment rules laid down in the 1996 Construction Act. Look, parliament is supreme. And when it comes to cash flow for construction contracts in the UK, the parties cannot cock a snook at parliament's rules. JCT98 cannot be read as a private piece of party-and-party legislation to defeat parliament's legislation.
Let me explain. Interim account No 20 had been agreed as a figure. That's the £400,000.
Look, parliament is supreme. And when it comes to cash flow the parties to a construction contract cannot cock a snook at parliament’s rules
The all-important final date for payment was 17 May 2003. JCT98 With Contractor's Design obeys parliament. It says that if the employer wishes to withhold money from that otherwise due, the employer shall, will, must serve a withholding notice shortly before 17 May. Parliament says: "No withholding notice means no withholding." Get it? Wimpey did not serve any withholding notice. No need. It probably hadn't got wind of what would happen the next week … the receivers marched in. Ah, but wait a minute. Lurking elsewhere in JCT98 are the rules for ousting the contractor from the site when it is in financial straits. Those rules plainly say: "Let's now all wait until the project is completed, pay nothing more and then do the final reconciliation." Wimpey argued that the JCT determination rules "retrospectively" altered the final date for payment. In short, it said the 17 May date fell away. The cry from Wimpey was that the parties have in JCT98 legislated their freedom of contract and thereby were not affected by the 1996 act. It argued that the parties had freely arranged their contractual bargain to deal with the awful circumstances of a contractor going bust. Yes, said the first judge, you are free to do that.
Can't, said the Court of Appeal. Apart from being all about adjudication, the 1996 act is all about cash flow. Section 111 therein says that if the final date for payment of an interim account has arrived, and if no withholding notice has by then been properly served, the money will be paid. So, on 17 May Melville Dundas had an accrued right to £400,000. After that date, it was overdue. Counsel for Melville Dundas said that if "freedom to contract" remained uninhibited by the act, it would render it a dead letter because it would allow a party to contract for a waiver of parliament's payment provisions. So, Wimpey will now be obliged to pay that cash plus interest.
Tony Bingham is a barrister and arbitrator specialising in construction, email@example.com.