HGCR Act 1996
Melville Dundas Ltd v George Wimpey UK Ltd [2007]

© Daniel Atkinson 2007 08 May 2007

Introduction

The important judgment of the House of Lords in  Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18 decided on 25 April 2007 is concerned with the inter-relationship between Section 111 HGCR Act 1996 and the provisions of a contract following determination of the employment of the contractor.  In the instant case receivers were appointed. 

The central matter was whether Melville was entitled to payment once the final date had passed without a notice of withholding by Wimpey. Two issues were required to be decided:

1. The interpretation of Clause 27.6.5.1 which expressed the rights of the Parties on the Employer determining the employment of the contractor, and
2. The effect of Section 111 HGCR Act 1996 on the operation of Clause 27.6.5.1.

Background

Wimpey engaged Melville as contractor for the construction of a housing development under the JCT Standard Form of Building Contract with Contractor's Design (1998 edition). Clause 30 provided for monthly applications for interim payments. By clause 30.3.6 the final date for payment of the amount due in an interim payment was 14 days after receipt by Wimpey of the application.

There was no dispute that Melville was entitled to an interim payment of £396,630 at the final date for payment of 16 May 2003, that Wimpey had not issued a notice of withholding and that Wimpey did not pay. On 22 May 2003 administrative receivers of Melville were appointed by its bank and on 30 May 2003 Wimpey exercised its right to determine the employment of Melville.

Interpretation of Clause 27.6.5.1

Clause 27.6.5.1 of the contract comprised an operative part and a proviso.

The operative part stated that the provisions of the contract which required "any further payment" no longer applied.

The proviso stated that Clause 27.6.5.1 did not prevent enforcement of Melville's rights in respect of amounts properly due to be paid by Wimpey, but unreasonably not paid, which had accrued 28 days or more before the date when Wimpey first gave notice determining employment.

All five Law Lords agreed that the effect of Clause 27.6.5.1 was that upon the determination by Wimpey the interim payment was no longer payable.  That point had been conceded in the lower courts, rightly in the view of the Law Lords.

1. Lord Hoffman held that the clause meant that Wimpey was not required to pay any more money. The effect of the clause was to disentitle Melville from being paid the instalment which before determination was due.
2. Lord Hope provided a more detailed analysis.  He considered that the term "any further payment" was unqualified and therefore clearly meant that Melville ceased to be entitled to any further payment whatever.  The provision was a temporary arrangement pending the account as a consequence of determination. The purpose of the proviso was to strike a balance between Wimpey and Melville.  Melville's interest was in enforcing sums already due before determination and Wimpey's interest was in retaining sums already due so that they could be set off against amounts claimed for the consequences of determination.
3. Lord Neuberger considered that without the proviso it may have been arguable that "further payment" was intended to be limited to sums that had not fallen due for payment, for which a final date for payment had not yet arisen.  In the light of the proviso he held that such an interpretation could not be maintained.
4. Lord Walker and Lord Mance did not give full judgments on this issue but agreed with the other Law Lords.

The central issue therefore was whether Section 111 of the HGCR Act 1996 made ineffective the operation of Clause 27.6.5.1 to permit Wimpey to withhold payment after the final date for payment, when there was no withholding notice.

The Effect of Section 111

The Law Lords Hoffman, Hope and Walker agreed that Clause 27.6.5.1 was not subject to Section 111 of the HGCR Act 1996 and therefore that no payment was due. 

The Law Lords Mance and Neuberger dissented.  The minority decision took a literal approach to interpretation of Section 111.

1. Lord Mance considered that Section 111(1) was unambiguous and unqualified. It was intended to crystallise a time when payment had to be made, after it had become due.  That was regardless of any grounds for refusing, unless the ground had been raised in a notice under section 111(2). He considered there was no room to read into Section 111 any exception based on grounds subsequently arising.  A sum due under the contract could not subsequently become "undue". Lord Mance recognised that situations of true insolvency carried a different statutory scheme, but crucially identified that in the instant case it was not a situation of statutory insolvency, but a contractual scheme.  Clause 27.6.5.1 operated not only when determination arose from insolvency or financial difficulty, but was triggered by alleged defaults. Lord Mance held that in neither situation should the operation of Section 111 be excluded.
2. Lord Neuberger preferred the simple approach to statutory interpretation. He held that the contractual provision was rendered ineffective by Section 111. He considered that that interpretation met the aims of Sections 110 and 111 of providing a clear and simple system to ensure that parties to construction contracts knew where they were with regard to payments and could have confidence about cash-flow.  Lord Neuberger accepted that under Section 109(2) the Parties were free to stipulate "circumstances" in which a sum became due.  He rejected the argument that such a provision allowed the Parties to agree circumstances in which once the final date for payment had passed that the sum might be retrospectively rendered "undue".  He recognised the danger that the argued interpretation would render Sections 109, 110 and 111 a dead letter.
3. A central argument appeared to be that since notice of a ground for refusing payment based on Clause 27.6.5.1 could not be given before the final date for payment, because determination occurred after, that in those circumstances the Section 111 notice provisions were not applicable. Lord Neuberger dealt with that argument by simply stating that if a particular interpretation of Sections 110 and 111 resulted in a conclusion that a notice required by Section 111 could not be served, then rather than implying an exception it was more appropriate to conclude that the interpretation was incorrect.
4. Lord Neuberger observed that there was an automatic set-off arrangement in the case of insolvency but considered that where the legislature had intended a rule in the HGCR Act 1996 to be inapplicable in insolvency cases, it had so expressly provided at Section 113(1).  The natural inference was Sections 109 - 111 were not intended to be disapplied in cases of insolvency.

Although the dissenting decisions are powerful in logic and analysis, they are not the majority view which is based on a purposive approach. The emphasis in the majority view was on the incidence of insolvency, although Clause 27.6.5.1 may also be triggered by other events

1. Lord Hoffman observed that on insolvency, liability to make an interim payment relates not to cash flow but to the substantive rights of the employer and the contractor's secured and unsecured creditors. He considered that allowing the employer security in the form of an unpaid instalment payment arose form the law of insolvency set-off not the terms of the contract.  Lord Hoffman did not distinguish between insolvency and the appointment of a receiver in that regard.
2. Lord Hoffman considered that to make Clause 27.6.5.1 subject to the notice requirement of Section 111(1) would be in effect to write it out of the contract. He considered that Section 111(1) had to be interpreted in such a way as to be compatible with Clause 27.6.5.1, since it was absurd to impute to Parliament an intention to nullify such clauses by the device of providing a notice requirement that could not be complied with. He considered that Parliament had not taken into account grounds for withholding that might arise after the final date for payment. Accordingly section 111(1) did not apply to a lawful ground for withholding payment of which it was in the nature of things not possible for notice to have been given within the statutory time frame.
3. Lord Hope considered that the literal interpretation of Section 111(1) led to a surprising result when applied to the situation regulated by the proviso to Clause 27.6.5.1. He considered that the mischief that Section 111(1) addressed was in relation to stage and periodic payments.  It was not aimed at sums already due in the context of determination and pending an account to identify the balance.
4. Lord Walker agreed with Lord Hoffman and did not give a full judgment.

Commentary

The majority decision suggests that there may be subsequent circumstances which may make a payment previously due, "undue".  It appears on Lord Hoffman's wider view that if the grounds for the notice of withholding only arise after the final date for payment, then Section 111(1) does not apply to those grounds, because it was impossible to give the required notice. It is possible to envisage many such circumstances. On Lord Hope's narrower view, Section 111(1) does not apply in situations of contractual determination pending an account of the balance. Time will tell which circumstances will make Section 111(1) ineffective to strike down a contractual provision.  The majority decision may apply only in situations of insolvency or appointment of receivers, or it may have a wider application in all situations of contractual determination of the contract or it may be of general application to all situations where the grounds for refusing payment arise after the final date for payment.

By reference to "circumstances" Section 109(2) anticipates that liability to pay could be subject to contingency.  Lord Hoffman was not prepared to state that there could not be an agreement to circumstances which would amount in practice to a denial of the entitlement to payment by instalments altogether.  This view opens up the possibility of cleverly drafted clauses effectively rendering Section 109(1) HGCR Act payment provisions nugatory, and undoing the strides taken in the industry since 1998.