There has been much discussion as to the scope of the decision of the House of Lords in Melville Dundas v Wimpey and how it will come to be applied by lower courts. Guidance has now been given by the decision of the TCC in Pierce Design v Johnston.

There were similarities and differences between Melville Dundas and Pierce Design.

Both concerned JCT 1998 wording.
In both cases the employer sought to rely on a contractual right to suspend payment following the determination of the contractor’s employment. The relevant wording of the suspensive clauses under both contracts was the same.
However, the contractor’s employment in Melville Dundas was determined owing to its insolvency. In contrast, in Pierce Design the basis for termination was contractor default.
In Pierce Design a number of the contractor’s interim payment applications had been short paid for a considerable period, seemingly because the employer was not satisfied with the contractor’s performance. Yet withholding notices were not issued by the employer.

Decision

HHJ Coulson QC applied Melville Dundas v Wimpey and held that the provision of the JCT 1998 form (clause 27.6.5.1) which permitted the suspension of payment in the event of the contractor’s employment being determined for default was not inconsistent with the Construction Act. The judge pointed out that the House of Lords had upheld the very clause that was in dispute. The fact that the contractor’s employment had been determined for default, not insolvency, was not a basis for holding the clause to be inconsistent with section 111 of the Construction Act.

As a twist, HHJ Coulson QC held, however, that the clause in question did not permit payment to be suspended for certain amounts which the employer had "unreasonably not paid". On the facts of this case, the employer had short-paid the contractor on a number of occasions more than 28 days before determination, without issuing withholding notices where they could and ought to have been issued. This conduct was unreasonable, so the employer could not rely on the clause to suspend payment of amounts that fell due a long time ago. The fact that the employer claimed it had an overtopping counterclaim at the date of trial made no difference.

Comment

Some commentators have suggested that Melville Dundas v Wimpey would only apply in cases where a contractor’s employment had been determined for insolvency, so that amounts that were due before insolvency would no longer be due. Pierce Design indicates that the position is broader, and that provisions entitling an employer to suspend payment upon contract determination are not invalid where the basis for determination is contractor default.

What remains to be seen is whether Melville Dundas v Wimpey applies in circumstances where a construction contract has not been determined, i.e. a project is still "live" as between employer and contractor, and valid withholding notices have not been issued.

Reference: Pierce Design International Ltd v Johnston [2007] EWHC 1691 (TCC)http://www.bailii.org/ew/cases/EWHC/TCC/2007/1691.html Interested in adjudication and construction issues? Take a look at our online facilities dedicated to adjudication cases and construction issues.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.


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