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Judgments - Melville Dundas Limited (in receivership) and others (Respondents) v. George Wimpey UK Limited and others (Appellants) (Scotland)

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    64.  It is also an approach that commends itself to me, at least as a matter of simple statutory interpretation. On the face of it at any rate, if a statute provides that a person "may not withhold payment" after a specified date has passed, it appears to me that a contractual provision that he may do so must be ineffective. That conclusion is supported, in my view, by the fact that sections 110 and 111 (and, indeed, sections 108, 109 and 113) appear to have the aims of (a) providing a clear and simple system to ensure that parties to construction contracts know where they are with regard to payments, and (b) ensuring that contractors and sub-contractors can be confident about their cash-flow.

    65.  I also consider that this conclusion is consistent with observations in the consultation paper, "Fair Construction Contracts", issued by the Department of the Environment in May 1995. This paper, tracked down by my noble and learned friend, Lord Hope of Craighead, was published after Sir Michael Latham's report referred to by Lord Hoffmann, and preceded the publication of the Bill which became the 1996 Act. In paragraph 19, the DoE paper indicated that the Act should provide that construction contracts should contain "certain essential terms [which] may not be omitted or substantially varied". Those essential terms were suggested in paragraph 23 as being "dispute resolution", "right of set off", "prompt payment", and "protection against insolvency". Paragraph 35 of the paper referred to the fact that the Latham report recommended a provision "for a clearly defined period … 'within which interim payments must be made …'", and that "any attempt to amend or delete" such a provision "should be invalid".

    66.  However, there are substantial arguments the other way, and I now turn to consider them.

    67.  The first argument is that it is clear that, in sections 109 to 111, the legislature did not intend to interfere, at any rate radically, with the freedom of parties to a construction contract to negotiate such terms as they see fit. The importance of freedom of contract is emphasised in three places, namely in section 109(2), the second sentence of section 110(1) and the first sentence of section 111(3). However, it is important to identify what those "freedom provisions" are concerned with. If a particular contractual clause is outside the ambit of any of those three freedom provisions, and, even more, if the clause conflicts with a specific statutory prohibition, then none of those provisions can assist the appellant.

    68.  The freedom provisions in sections 110(1) and 111(3) are not in point in the present case. The freedom provision in section 109(2), particularly with its reference to "circumstances", can fairly be said to be more in point. If parties are free to stipulate the "circumstances" in which a sum "become[s] due", then I see the force of the argument that, at least in the absence of any other statutory provision to contrary, they should be free to agree circumstances where a sum, which has become due, ceases, in a sense retrospectively, to be due. However, that does not necessarily follow as a matter of language, and whether section 109(2) has that effect must be assessed by considering the other relevant provisions of the 1996 Act.

    69.  In that connection, it appears to me that there are three problems with the contention that section 109(2) entitles parties to agree in their contract that, once a "final date for payment" of a sum has passed, the sum can nonetheless cease to be due for payment. First, as my noble and learned friend, Lord Mance, pointed out in argument, the contention proves too much: if right, it would be possible for parties to agree terms which could retrospectively render undue a stage payment, which had become due for final payment, in almost any circumstances which they wished. If section 109(2) enabled parties freely to agree any circumstances they wished in which stage payments which had become due should cease to be treated as due, section 109 and indeed sections 110 and 111, could be rendered a dead letter. The only answer suggested to this point was that such a provision would be ineffective if its effect was to circumvent the provisions of sections 109 to 111. I do not find that a satisfactory answer, not least because it would be hard to define with any confidence circumstances in which a contractual provision would undermine or circumvent the purpose of those provisions. Indeed, in the context of the present dispute, it is almost a circular argument.

    70.  Secondly, all that section 109(2) is concerned with is to ensure that a construction contract should provide for stage payments, and what section 109(2) is doing is to emphasise that the parties are free to agree the circumstances in which such stage payments arise. However, once they have agreed, as in this case they have agreed, on terms that satisfy section 109(1), then the provisions of sections 110 and 111 apply, and the appellant's case then runs into the problem of the simple and clear meaning of section 111(1) read together with section 110(1)(b).

    71.  Thirdly, if a sum whose final date for payment has passed can subsequently cease to be due, then the notice requirements of section 111 cannot be applicable, as they have to be implemented before "the final date for payment". If a particular interpretation of sections 110 and 111 results in the conclusion that a notice which appears to be required by section 111 cannot be served, then rather than implying a term or an exception that, in such circumstances, no notice is needed, it seems to me more appropriate to conclude that the particular interpretation is incorrect.

    72.  The second argument which must be considered is that, by virtue of the termination of the Contract on 30 May, and the fact that it could have been determined by 22 May, the effect of clause is that the Sum, which had fallen due for payment within the 28 days prior to 22 May, ceased to be a "sum due under the contract" within section 111(1), and therefore section 111 ceased to apply to it. That is an ingenious argument, but I would reject it.

    73.  In the first place, it suffers from the same problem as the appellant's reliance on section 109(2) identified by Lord Mance, namely that such an interpretation would mean that parties could agree a term that could effectively render the provisions of section 109 and 111 entirely nugatory, unless one could invoke the vague and unsatisfactory proposition that any such term would be invalid, if in the court's view, it undermined or circumvented the purpose of those sections.

    74.  Secondly, it seems to me that such an interpretation of section 111(1) involves an inappropriate semantic analysis. The subsection is concerned with the "final date for payment of a sum due under the contract", which relates back to section 110(1)(b). It does not appear to me that the notion of the sum becoming due on its final date and for some reason ceasing to be due lies easily with the purpose of the three sections, in particular with the emphasis on finality in section 111.

    75.  The third argument which has been raised is that the provisions of section 109 to111 do not apply once a construction contract has determined.

    76.  During argument, it was conceded on behalf of the appellant that the sections applied to a final payment under a construction contract just as much as the applied to interim payments. I consider that concession to be well founded. The heading of that part of the 1996 Act containing sections 109 to113 is simply "Payment". This contrasts with the text of section 109 itself which, by its title and in the light of the opening words of subsection (1), is clearly concerned with stage or interim payments. However, sections 110 and 111 refer simply to payments or sums "due under the contract" and require notices to be given in respect thereof. The contrast between sections 110 and 111, on the one hand, and, on the other hand, section 109 speaks for itself. Furthermore, the purposes of section 110 and 111 appear to be (a) to enable a contractor to know very promptly whether a payment he is seeking is challenged in whole or in part by the employer, and if so, on what grounds, and (b) to enable the adjudication procedure in section 108 to be implemented. Accordingly, I consider that it was a realistic concession on behalf of the appellant that that sections 110 and 111 should apply to final payment. This as I see it, is relevant to the present dispute, because it emphasises that, merely because a construction contract has "determined", in the sense of the building work ceasing, that does not mean that the provisions of sections 109 to 111 cease to apply, as there could be many payments which remain outstanding.

    77.  In addition, it seems to me that it would cut across the purpose of section 111(1) if what appeared to be a final date for payment, with its concomitant prohibition on refusal to pay, could somehow be retrospectively vitiated simply because the contract has been brought to an end. If, as I see it, the purpose of sections 110 and 111 is to assist the cash flow for contractors and subcontractors, then it seems to me that it would be inconsistent with the way in which section 111(1) is expressed and also with its purpose, if it ceased effectively to be effective on the determination of the contract, at least in a case such as this, where determination occurs after the final date for payment had passed.

    78.  Fourthly, it was suggested with some force in my view, that at least so far as it was concerned with insolvency, a provision such as clause was not intended to be subverted by sections 109 to111. Once a contractor becomes insolvent, there is at any rate in English law, and as I understand it in Scots law, an automatic set off arrangement (see rule 4.90 of the Insolvency Rule 1986 as discussed in Stein v Blake [1996] AC 243 and, in the context of a case such as this, in Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd [2000] BLR 522 paras 29-34). Accordingly, the importance given by the legislature to cash flow for contractors and subcontractors in sections 109 to 111 effectively gives way to the importance of rights of creditors once there is an insolvency. In those circumstances, one can see the argument that there should be nothing objectionable in the parties providing for a regime such as that contemplated by the proviso to clause in anticipation of liquidation. Indeed, it can be said with some force that the 1996 Act itself (in section 113) recognises that different considerations may arise when the contractor is insolvent or (as in the present case) where the contractor is in a position similar to insolvency, namely in administration, or subject to the appointment of an administrative receiver or a manager.

    79.  While, as I say, there is obvious force in that point, it seems to me that the very fact that the legislature has excluded from the prohibition contained in section 113(1) cases of insolvency (as defined in the following subsections) can be said to undermine, rather than to support, the contention of sections 109 to 111 should not be interpreted so as to apply in a case of insolvency. Where the legislature intended a rule in this part of the 1996 Act to be inapplicable in cases of insolvency, the legislation expressly so provided, so that, where there is no such specific exclusion, as in sections 109 to 111, the natural inference is that the provisions are not intended to be disapplied in cases of insolvency.

    80.  The DoE paper discussed insolvency at paras 39 to 43. It suggested that contracts might be required to include provisions setting up trust funds which could be used to pay contractors and sub-contractors in the event of insolvency of an employer and a contractor respectively. These proposals were not adopted, but they tend to suggest that it was not the intention that insolvency should result in payments ceasing, and a case where the final date for payment had passed before the insolvency, as in this case, could be said to be a fortiori.

    81.  Fifthly, it was suggested that sections 110 and 111 should be given a relatively limited meaning in terms of their potential interference with freedom of contract, because their purpose was ultimately merely supplementary to the important adjudication provisions in section 108. It is true that there is some support for that proposition (in something of a throwaway line in paragraph 23 of the judgment of Sir Murray Stuart-Smith in C & B Scene Concept Design Ltd v Isobars Ltd [2002] BLR 93), and it is also true that, as already mentioned, part of the purpose of sections 110 and 111 is to enable a contractor to know whether his claim for payment is disputed and on what grounds it is disputed, in order to enable him (or indeed the employer) to decide whether to seek adjudication under section 108.

    82.  However, I do not think it can be possibly said that the purpose of sections 109 to111 is merely to be supplementary to section 108. First, section 108 is subject to its own heading, "Adjudication", whereas, as already mentioned, sections 109 to113 are subject to a different heading, namely "Payment". Secondly, the provisions of sections 109, 112 and 113 clearly impose free-standing and substantive rights or prohibitions on parties to construction contracts, in that they are rights which do not relate, at any rate exclusively, to the existence of the adjudication system introduced by section 108. Thirdly, the way in which the purpose of what became sections 108 to 114 is described in paragraph 23 of the DoE paper seems to me hard to reconcile with the view that sections 109, 110 and 111 are merely supportive of section 108.

    83.  In all these circumstances, I do not consider that any of the arguments advanced on behalf of the appellant are persuasive, or at any rate persuasive enough to justify departing from a natural meaning of sections 110(1) and 111(1), read according to their natural tenor in their context.


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