The case for suspenders

In common with many others I have been eagerly awaiting the House of Lords’ first judgment on the Construction Act. Last fortnight it arrived – nine years after the act came into force. Unfortunately, it is a reminder to be careful what you wish for.

The five law lords were divided in their opinions about what the act meant, but united in their criticism of its poor drafting. The controversy this case will attract will be matched only by disagreements over its meaning.

The facts were these: George Wimpey engaged Melville Dundas to construct houses in Glasgow, on a contract that incorporated a JCT98 With Contractor’s Design form.

On 2 May 2003 Melville Dundas applied for a payment of about £400,000. On 22 May, its bank appointed administrative receivers so, on 30 May, Wimpey terminated the contract.

But the housebuilder had failed to issue a valid withholding notice five days before the final date of payment of 16 May. As we all know – or thought we knew – the contractor was therefore entitled to payment in full.

However, Wimpey did not pay. It relied on clause 27.6 of JCT98 to suspend any further payments until a later reckoning. Clause 27.6 protects employer that validly terminates a contract and has to pay others to complete the work, from having to pay the contractor money it owes but which it might never see again. Melville Dundas said the Construction Act invalidated clause 27.6 because it denied the right to payment if a valid withholding notice had not been given.

By a majority of 3:2 the lords decided that clause 27.6 was valid: Wimpey was entitled to suspend payment after terminating the contract even though it had given no valid withholding notice. Although the aim of the act was to improve cash flow, that consideration fell away when a contractor became insolvent and the contract was terminated.

This uncertainty does not drive a JCB through the Construction Act but it does drive a small digger through it

The majority’s view of what the act means should make payers happy. It said parliament, and hence the JCT, could not have intended to prevent a payer from withholding when it had not given valid notice in cases where the grounds for withholding arose after the final date for payment. Wimpey could not have given a withholding notice on time because Melville Dundas went insolvent 11 days after the notice was due. Consequently, Wimpey should not be prevented from withholding payment.

Taken to its extreme, this approach allows payers who do not give a valid notice to withhold on grounds that would have been impossible to assert before the deadline. Such a payer who claims, say, that a defect arose after the withholding notice was due, might be entitled to deduct for the cost of rectifying the defective work. Often this should not be a problem because the deduction can be made from the next payment. However, in the context of a dispute, payers who have not given withholding notices would be foolish not to rely upon this case.

Although the decision is binding in Scotland and only has persuasive authority in England and Wales, there is a policy of applying the act consistently on both sides of the border. In any event, it would be a brave judge or adjudicator who did not follow the opinion of three law lords.

This new-found uncertainty means that payees no longer have a clear-cut case when a withholding notice is not given. It does not drive a JCB through the act but it does drive a small digger through it. It also raises questions about whether there are other sections of the act that should not be applied literally, as there has always been conflict between the act’s intentions and its words.

The one certain thing that has emerged from Melville Dundas vs Wimpey is that termination clauses like those in JCT98 are valid. This judgment cannot be appealed, so pending another House of Lords case we can only wait and see how the majority’s opinion will be applied.

Quite how the much the delayed review of the act will address the difficulties raised also remains to be seen.