is contractor's cash flow king under the Construction Act?

According to the House of Lords in Melville Dundas Ltd –v– George Wimpey (2007), the answer is no. In essence, provided that the contract allows, even an employer that has not served a valid withholding notice can withhold payments that are already due to an insolvent contractor.

One of the aims of the 1996 Construction Act is to safeguard contractors' cash-flow. An element of this is that the employer must issue a valid notice before attempting to withhold any payment that has fallen "due". The contract used in this case provided for termination and withholding of payments should an insolvency event take place. There was a clear tension between the Act and the contract. The House of Lords decided, under the insolvency provisions, that the contract allowed the employer under contract (Wimpey) to avoid paying the “due” instalment. They rejected Melville Dundas' argument that once a payment was due it could not become "undue". The wording covered "any further payment" and all five judges held that the insolvent contractor ceased to be entitled to any further payment, whether due or not.

The judges had more difficulty with the issue of whether Wimpey could withhold payment based on the contractual position, as they had not issued a valid withholding notice under the Act.

By a slim majority they held that the Act must be interpreted in a way that was compatible with the insolvency provisions in the contract. The court also found that it could not have been Parliament's intention to deny employers protection under established insolvency provisions if there was no way they could serve a notice (given that the contractor became insolvent after the due date for the payment).  They concluded that Parliament would rather have included an express provision to cover insolvency issues in the Act.

Consequently, contractors no longer have a clear case if the employer fails to issue a withholding notice. It is possible that this decision lets employers withhold payments on grounds that would have been impossible to argue before a payment deadline. This may even extend to defects that arise after a withholding notice is due, allowing the employer to retain the cost of fixing the problem. While this is conjecture, contractors and employers (and indeed insolvency practitioners) must note that termination clauses like those in the JCT forms are not overruled by the Act.

For further information please contact Richard Wade on 01865 254244 or email richard.wade@bllaw.co.uk