Withholding Notices and Determination

01.01.07

Withholding Notices and Determination

The Application and Limitation of Melville Dundas -v- Wimpey

The recent House of Lords decision of Melville & Dundas -v- Wimpey has attracted much commentary in the construction press. For those who haven't read it, the Lords said that an employer under a JCT/ SBCC contract did not have to pay a contractor sums that were "due" under a contract, where the contract had been determined within 28 days of the sums falling due. This was the case even if no withholding notice had been served. The case turned on the specific wording of clause 27.6.5.1 of the 1998 JCT Design and Build Form. Surely this clause falls foul of the Housing Grants etc Act which says that if there is no withholding notice, sums which are due have to be paid? Not according to the Lords.

Some of the principles of this case were tested in the recent English decision of Pierce Design International Limited -v- Mr and Mrs Johnston. The Johnstons had contracted with Pierce on the JCT Design and Build Form. A series of valuations had been submitted by Pierce, a number of which were not met in full by the Johnstons. The cumulative total was just under £100,000. Take note: the 1998 form, unamended, is for the savvy employer only, because in the absence of a withholding notice, the contractor's application falls due, regardless of its content. Back to the Johnstons - months later, they determined the contract on account of the contractor's breach. Pierce went to Court and argued that there was no defence to the non payment of sums against which there were no withholding notices.

The Court considered whether the principle of Melville Dundas applied here. It is difficult to see why this was argued at all, given that sums were due more than 28 days before the determination. Be that as it may, Pierce's barrister argued that Melville Dundas turned on its particular facts, paramount to which was that it had become insolvent. Here there was no question of Pierce's insolvency, so on the facts of this case, the contractual provisions which allowed the employer not to make payment did fall foul of the Housing Grant etc Act. The Court had no difficulty in rejecting this argument - if the Lords said that clause 27.6.5.1 was not contrary to the Housing Grants Act, it didn't matter how the contract was determined. It would be illogical to say that the clause is only valid in cases of contractor insolvency, but invalid for some of other contractor breach. So, on this argument, Pierce lost.

Their second argument was clearly stronger. It was also very simple: sums were due, there were no withholding notices, and there has been no payment. Therefore, payment must be made. In response, the Johnston's barrister argued an interesting point. If you look closely at 27.6.5.1, it refers to the contractor having a right to be paid "where the employer has unreasonably not paid" (emphasis added). What does "unreasonably" mean? Here, it was argued that the Johnstons have substantial counterclaims, and as such, the question of reasonableness had to be looked at the present tense. It didn't matter if, at the time the contractor was submitting his applications, it would have been unreasonable not to have made payment. The Judge disagreed with this argument by saying that a failure to make payment in full in the absence of a withholding notice was in itself unreasonable. So, on this argument, Pierce succeeded, and the Johnstons had to pay up. A victory, I think, for common sense.

A couple of practical points emerge from this, namely:

  • The Melville Dundas decision upholding the validity of a clause which suspends the employer's right to make payment following the contractor's determination (albeit only in terms of what was due in the preceding 28 days) does not just apply where there has been determination on the ground of insolvency
  • The withholding notice continues to be an essential piece of paper, and its absence trumps the employer who has his own claims against the builder - even though the builder's employment may have been brought to an end.

For more information please contact Alistair Dean on 0131 656 0032 or at alistair.dean@brodies.com