Melville Dundas Ltd v. Hotel Corporation Of Edinburgh Ltd [2006] ScotCS CSOH_136

This summary was provided by CMS Cameron McKenna LLP.

For more information visit

In this case, the court drew a distinction between settlement agreements that are independent of an underlying construction contract and settlement agreements that merely determine sums that are due under a construction contract. Withholding notices under the HGCRA need only be given in the latter case.

Court of Session, Outer House, Scotland

Lord Drummond Young

Hotel Corporation of Edinburgh Limited (“HCEL”) are the owners of the Sheraton Hotel in Edinburgh. Melville Dundas Limited (“MDL”) are building contractors, who were employed by HCEL to carry out the internal fit out of the Sheraton Hotel. Following completion of the work by MDL, various defects emerged in the work that had been carried out. The most significant of these related to major cracking which had appeared in the external glazing around the spa area of the hotel. The parties disputed what caused the defects, and also whether the cost of the remedial works was covered by HCEL’s insurance.

The parties attempted to settle their differences amicably and in July 2003 they entered into a settlement agreement. The settlement agreement included an agreed final account sum; an agreed list of defects (which specifically excluded the glazing issue); and an agreement that HCEL would be allowed to withhold £90,000 from the final account sum pending a determination of responsibility for the glazing issue. In the event that the £90,000 had not been released before 31 July 2004, the whole sum would be released except to the extent that it had been established by agreement or any court action that MDL were liable for the glazing defects.

31 July 2004 came and went, without payment by HCEL of the £90,000. MDL therefore commenced proceedings to recover the sum. HCEL argued that MDL was not entitled to payment of the £90,000 for a number of reasons. MDL said that if HCEL’s position was correct and it was entitled to withhold payment of the £90,000 sum, it should have issued a notice of withholding pursuant to section 111(1) of the Housing Grants, Construction and Regeneration Act 1996 (“the Act”). It was not suggested by HCEL that any notice of intention to withhold payment had been issued.

Section 111 of the Act only applies to construction contracts (as defined by section 104(1) of the Act). HCEL argued that the contract under which the money was due – the settlement agreement – was not a construction contract; it was rather to be regarded as standing by itself, independently of the underlying construction contract.

Lord Drummond Young said that it was important to draw a distinction between settlement agreements that are independent of the underlying construction contract and agreements that merely determine sums that are due under the construction contract. The judge gave an example of the former category as an agreement to accept payment of a specified sum in full and final settlement of all claims arising out of a construction contract. An example of the latter, he said, is an agreement that the amount of the contractual retention under a construction contract should be fixed at a specific sum. In the latter type of case, all the parties have done is agree a particular sum that will be given effect though the mechanisms under the construction contract.

The judge recognised that some settlement agreements, such as the one in this case, will include parts of which are to be considered independent and other parts which give effect to the construction contract.

The judge held that whilst the agreed final account sum merely gave effect to the construction contract, the agreement that £90,000 should be withheld pending resolution of the glazing issue was an independent settlement of a discrete element in the parties’ dispute. Accordingly, section 111 of the Act did not apply to the issue in dispute in the present case.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit

Click here to read full-screen | Click here to print the case