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Melville Dundas Limited (in receivership) and others (Respondents) v. George Wimpey UK Limited and others (Appellants) (Scotland)
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
Melville Dundas Limited (in receivership) and others (Respondents) v. George Wimpey UK Limited and others (Appellants) (Scotland)
 UKHL 18
1. This is a dispute over liability to make an interim payment under a building contract. The facts may be shortly stated. The appellant George Wimpey UK Ltd ("Wimpey") contracted with the respondent Melville Dundas Ltd ("the contractor") for the construction of a housing development in Whitecraigs, Glasgow for a total sum of £7,088,270. The contract incorporated the conditions of JCT Standard Form of Building Contract with Contractor's Design (1998 edition) which provided in clause 30 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 the employer of the application.
2. On 2 May 2003 the contractor applied for an interim payment of £396,630. There is no dispute that the contractor was entitled to be paid that sum or that the final date for payment was therefore 16 May 2003. Wimpey did not pay on that date and on 22 May 2003 administrative receivers of the contractor were appointed by its bank. Clause 27.3.4 provides that if the contractor has an administrative receiver appointed, the employer may determine the employment of the contractor. Wimpey exercised this right on 30 May 2003. That brought into effect clause 184.108.40.206, which is central to the dispute:
3. In the lower courts it appears to have been conceded that the effect of this clause was that upon determination by Wimpey, the interim payment was no longer payable. It had accrued less than 28 days before 22 May 2003, which was the date on which Wimpey could first have given notice of determination. Before the House, however, Mr Howie QC submitted on behalf of the contractor that the words "which require any further payment to the contractor" should be read to mean "which give rise to any further liability to make payments to the contractor" and have no application to a liability for interim payment which has already accrued. In my opinion this is not what the clause says. "Require any further payment" means require the employer to pay any more money. Mr Howie's construction would make the proviso pointless, since the clause could not then apply to any amounts "properly due to be paid by the employer to the contractor", whenever they had accrued.
4. The next question is whether the effect of clause 220.127.116.11 is invalidated by the provisions of Part II of the Housing Grants, Construction and Regeneration Act 1996. These were enacted to give effect to certain of the recommendations of Sir Michael Latham's report Constructing the Team (1994). Broadly speaking, they deal with three topics: summary adjudication to enable the parties to obtain a provisional but enforceable ruling on any matter in dispute (section 108); entitlement to stage payments (sections 109 and 110) and the prohibition of conditional payment provisions (section 113). There are also certain provisions about notices in sections 110 and 111 to which I shall return later.
5. The only provisions directly relevant to the validity of clause 18.104.22.168 are those which concern the entitlement to stage payments. The effect of the clause is to disentitle a contractor from being paid an instalment to which, until determination under clause 27.3.4, he would have been entitled under the contract. Is there anything in the Act which says that the contract cannot so provide? Section 109(1) says that, subject to an exception for short contracts
6. In addition, section 110(1) provides that
7. If the contract does not comply with the requirements of sections 109 and 110(1), the terms of a statutory model contract called "the Scheme for Construction Contracts" are to apply instead. It is not however suggested that the JCT conditions failed to provide for payment by instalments or for the matters mentioned in section 110(1). The question is whether they could in addition provide that in the circumstances specified in clause 22.214.171.124, an instalment payment which had previously been payable should cease to be payable.
8. Apart from the requirements of sections 109(1) and 110(1), the Act does not purport to interfere with the freedom of the parties to make their own terms about interim payments. Section 109(2) says:
9. The references to "circumstances" shows that Parliament did not require that stage payments should become inexorably due at fixed intervals but that liability to pay them could be subject to contingency. Mr Howie submitted that the parties were free to agree on the circumstances in which interim payments would "become due" but not on any circumstances in which, having become due, they would cease to be due. In my opinion this is an over-literal reading of legislation which was intended to have practical application to a wide variety of contractual relationships. I can think of no reason why Parliament should have left the parties free to agree the circumstances on which instalment payments should fall due but then insisted that nothing should be capable of discharging that liability. Mr Howie suggested that it was in the interests of certainty. But certainty does not require unalterability if the grounds of alteration are sufficiently certain. There can be no uncertainty about whether administrative receivers have been appointed and the contract therefore provides an "adequate mechanism" for determining whether a payment is due.
10. It is apparent from sections 109 and 110(1) that their object was to introduce clarity and certainty as to the terms of a construction contract rather than to dictate to the industry what those terms should be. The only substantive requirement is that the contractor should be "entitled to payment by instalments" and that there should be an adequate mechanism for determining what he is entitled to be paid and when. But the statute goes no further.
11. I would not go so far as to say that there could not be an agreement as to the circumstances in which instalment payments should fall due which would amount in practice to a denial of the entitlement to payment by instalments altogether. But this is not such a case. Instalments payments are in their nature provisional liabilities. As has been frequently said, they are to provide the cash flow for the contractor or sub-contractor to enable him to perform his duties under the contract. But when the contractor's employment has been determined in consequence of the appointment of a receiver, two consequences follow. First, the contractor no longer has any duties to perform. Secondly, the liability to make an interim payment is no longer provisional. While the employer retains the money, he can set it off against his cross-claim for non-completion against the contractor. In practice, where the contractor has become insolvent, the employer will have a cross-claim for damages which exceeds the contractor's claim for unpaid work. On the other hand, once the employer has paid the money, it is gone. It is swept up by the bank's floating charge and the employer will have to prove in the liquidation for his cross-claim. Upon insolvency, liability to make an interim payment therefore becomes a matter which relates not to cash flow but to the substantive rights of the employer on the one hand and the contractor's secured or unsecured creditors on the other.
12. The Inner House ( SLT 95) in holding that clause 126.96.36.199 was in conflict with the terms of the 1996 Act, said (at p. 104) that if a contractor became insolvent, Parliament "has provided quite clearly that the losses should be borne by the employers under the contract." My Lords, I can find no trace of such an intention. It seems to me most unlikely that Parliament intended that provisions intended to improve the efficiency of the construction industry should determine priorities between the employer and an insolvent contractor's creditors. The Inner House added that not only would there be bankers with an interest in the [insolvent] contractor's cash flow but "there will be subcontractors awaiting payment". This seems to be based upon some misapprehension, because in most cases the position of subcontractors would be in no way improved by construing the Act as disabling an employer from retaining the money which provides him with security for his cross-claim. If he is made to pay, the money will go to the bank and neither the contractor nor the subcontractors will get anything.
13. A provision such as clause 188.8.131.52, which gives the employer a limited right to retain funds by way of security for his cross-claims, seems to me a reasonable compromise between discouraging employers from retaining interim payments against the possibility that a contractor who is performing the contract might become insolvent at some future date (which may well be self-fulfilling) and allowing the interim payment system to be used for a purpose for which it was never intended, namely to improve the position of an insolvent contractor's secured or unsecured creditors against the employer. Mr Howie said that to allow the employer any security in the form of an unpaid instalment payment would be to allow him to profit from his own wrong. But the security arises, not from the terms of the contract but from the law of bankruptcy set-off. As Chadwick LJ pointed out in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd  BLR 522, any creditor who owes a debt to an insolvent company, no matter how long overdue, may set off that debt in full against his own claim in the liquidation. It is in any case artificial to speak of the employer profiting from his own wrong when the contractor has no further interest in the matter and the issue is one of priority between the employer and the contractor's other creditors.
14. Although it is true that the appointment of an administrative receiver does not necessarily mean that the company is insolvent, it is common to treat such an appointment as evidence of insolvency (compare the definition of insolvency in section 113(2) of the Act) and it is admitted that in this case the contractors were in fact heavily insolvent. We were told that the clause has been part of the JCT Conditions for a long time one and must infer that when those conditions were redrafted in 1998 to give effect to the provisions of the 1996 Act, the various industry bodies involved in the drafting saw no conflict.
15. In my opinion, there is no conflict between clause 184.108.40.206 and the statutory requirements as to the terms which the contract should contain. That leaves for consideration the notice provisions in section 110(2) and 111, which figured large in the judgments below:
16. The drafting of these provisions is not felicitous. Serving a notice under section 110(2) seems to have no consequences (except that it may stand as a notice under section 111(1)) and there is no penalty for not doing so. The purpose of section 110(2) is therefore something of a puzzle. It seems to have dropped from heaven into the legislative process on its last day in the House of Commons, when the bill had emerged from Standing Committee and was being debated for second reading. The amendment by which it was inserted was neither explained nor debated.
17. Fortunately, your Lordships do not have to consider section 110(2) and its relationship to section 111(1). The contractor relies entirely on the latter section. Mr Howie says that Wimpey is not entitled to withhold the interim payment because it did not serve a notice earlier than the prescribed period (which the JCT Conditions fix at 5 days) before the final date for payment on 16 May 2003.
18. In the present case, it would not have been possible for Wimpey to serve such a notice by 11 May 2003. The earliest that they could have known that they were entitled to withhold the interim payment was when the receivers were appointed on 22 May 2003. To make clause 220.127.116.11 subject to the notice requirement of section 111(1) would be in effect to write it out of the contract.
19. What is the purpose of the notice requirement in section 111(1)? Obviously to enable the contractor to know immediately and with clarity why a payment is being withheld. It is primarily part of the machinery of adjudication, so that the contractor can decide whether he should dispute the employer's right to withhold the payment and refer the question to adjudication. But I suppose it also provides the contractor with information for the purpose of any other action which may depend upon knowing the reason why a payment is being withheld.
20. In the case of clause 18.104.22.168 the contractor will have been given notice of why the payment is being withheld because he will have received the notice of determination. But the retrospective operation of the clause means that he will not have received it within the time stipulated in the statute. It seems to me, however, that it would be absurd to impute to Parliament an intention to nullify clauses like 22.214.171.124, not by express provision in the statute, but by the device of providing a notice requirement with which the employer can never comply. Section 111(1) must be construed in a way which is compatible with the operation of clause 126.96.36.199.
21. The Lord Ordinary (Clarke) solved the problem by holding that section 111(1) applied only during the currency of employment under the contract and not after that employment had been determined. I doubt whether that can be right. The employer may be withholding a payment on the ground that he has determined the employment for breach under clause 27.2 and in such a case I think that the contractor should be entitled to a notice stating the grounds for determination, so that he may refer the question for adjudication. Before the Inner House, counsel for Wimpey submitted that the effect of clause 188.8.131.52 was to extend the final date for payment until after the final account had been taken. I do not think this is right either. In my opinion the concept of a "final date for payment" in the Act applies only to interim payments. Clause 184.108.40.206 does not extend the final date for making the interim payment. It makes it cease to be payable as such. Before the House, Mr Akenhead QC submitted for Wimpey that once clause 27.6.5.l had operated, the interim payment was no longer "due" within the meaning of section 111(1). This is an attractive submission because once a receiver has been appointed, the interim payment is, under the terms of the contract, plainly not due. But I find it difficult to give the word "due" in section 111(1) a consistent meaning which excludes this case, because it must include cases in which the payment turns out, after adjudication or litigation, not to have been due.
22. The problem arises because I very much doubt whether Parliament, in enacting section 111(1), took into account that parties would enter into contracts under which the ground for withholding a payment might arise after the final date for payment. One cannot therefore find an answer in a close examination of the language of the section. I would prefer simply to say lex non cogit ad impossibilia and that on this ground section 111(1) should be construed as not applying 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. That may not be particularly elegant, but the alternative is to hold that the parties' substantive freedom of contract has been indirectly curtailed by a mere piece of machinery, the operation of which would serve no practical purpose. This I find even less attractive. I would therefore allow the appeal and restore the interlocutor of the Lord Ordinary.LORD HOPE OF CRAIGHEAD
23. In this case a contractor (now in receivership) sues the employer under a construction contract for an interim payment which had been applied for less than 28 days before appointment of the receiver, on which ground the employer determined the contractor's employment under the contract. The solution to the problem it raises is to be found in the answer to two questions. The first is what is meant by the words "any further payment" in the opening words of clause 220.127.116.11 of the JCT Standard Form of Building Contract with Contractor's Design 1998 Edition ("JCT 1998"), which was incorporated into the Scottish Building Contract with Contractor's Design Sectional Completion Edition (January 2000 Revision) which the parties entered into in March 2002. The second is whether section 111(1) of the Housing Grants, Construction and Regeneration Act 1996 applies to prevent the employer from relying on the protection which clause 18.104.22.168 would otherwise afford to him in the events that it refers to.
24. There was no dispute in the Court of Session as to how the first question should be answered. Mr Howie QC for the respondents accepted in the discussion in the Outer House before the Commercial Judge, Lord Clarke, that if the question as to the contractor's entitlement to be paid the sum sued for under the interim certificate turned on an analysis of the contractual provisions, he was not in a position to contradict the construction of clause 22.214.171.124 that was contended for by the employer: 2005 SLT 24, para 7. He renewed this concession in the Inner House. Lord Nimmo Smith, who delivered the opinion of the Extra Division, said that the court proceeded on the assumption that, in the absence of the statutory provisions, clause 126.96.36.199 would, in the circumstances of this case, entitle the employer to withhold payment of the sum sued for until the completion of the works and the preparation of the account provided for by clause 188.8.131.52: 2006 SLT 95, para 31. Mr Howie confessed to have been haunted by this concession as he sought to argue the contrary before your Lordships. But in my opinion his first instincts were right. I think that the assumption on which the Extra Division proceeded stands up to examination when the wording of clause 184.108.40.206 is analysed.
25. The opening words of clause 220.127.116.11 state:
The clause then goes on to say that it shall not be construed so as to prevent the enforcement by the contractor of any rights under the contract in respect of amounts properly due to be paid by the employer to the contractor which the employer has unreasonably not paid and, where the contractor's employment has been determined on the ground of insolvency (other than cases where the employment is determined automatically under clause 27.3.3), have accrued 28 days or more before the date when the employer could first have given notice to determine his employment.
26. Mr Howie said that once a sum had become due under the contract it could not cease to be due. The words "any further payment" should not be read as including an interim payment which the employer was already obliged to pay under clause 30.3.5 because the final date for its payment in terms of clause 30.3.6 had already passed by the date of the determination of the contractor's employment. The position would have been different if the employer had given a written notice to the contractor under clause 30.3. 4 not later than 5 days before the final date for payment stating the amount proposed to be withheld and the grounds for doing so. No such notice was given in this case. As the interim payment was an amount that the employer was already due to pay under the provisions of the contract before the determination of the contractor's employment, it was not a "further payment".
27. There are two problems with this argument. First, it involves reading into this part of the clause words that are not there. It seeks to confine it to payments which are not already due. But the words "any further payment" are unqualified. Their plain meaning is that the contractor ceases to be entitled to require any further payment whatever. As my noble and learned friend Lord Hoffmann has said, their effect is that the contractor cannot require the employer to pay any more money. This is, of course, a temporary arrangement, as the reference to clause 18.104.22.168 at the beginning of the clause indicates. The employer cannot be required to pay any more money to the contractor in the meantime, pending the making up of the account as to the consequences of the determination referred to in clause 22.214.171.124.
28. Secondly, if the words "not already due" were to be read into this part of the clause, there would be no need for the proviso which permits the contractor, under certain conditions, to enforce any rights under the contract in respect of amounts properly due to be paid by the employer despite the determination of his employment. The purpose of the proviso is to strike a balance between the contractor and the employer. The contractor's interest lies in enforcing the payment of sums which were already due before the determination. The employer's interest lies in retaining sums already due so that they can be set off against amounts which he can properly claim against the contractor in consequence of the determination of his employment under the contract. Thus the purpose of the clause, read as a whole, is to bring the contractor's right to enforce payment of any sums which have not already been paid to him by the employer to an end, except to the extent which the proviso permits, pending the making up of an account under clause 126.96.36.199.