Pierce Design International Ltd v Johnston [2007] EWHC 1691 (TCC)

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

The TCC has upheld a provision entitling an employer to withhold payment without having issued a withholding notice where the contract was determined for default of the contractor.  This effectively confirms that the House of Lords decision in Melville Dundas v Wimpey is not limited to situations of insolvency and/or impossibility of issuing a withholding notice.

His Honour Judge Coulson QC – Queen’s Bench Division, Technology and Construction Court

Background

The defendants engaged the claimant to carry out construction works under a contract incorporating the JCT Standard Form of Building Contract (With Contractor’s Design), 1998 edition (with amendments).  The defendants failed to pay in full a number of interim payments without issuing valid withholding notices.  There were complaints by the defendants about defects and incomplete works, which culminated in the defendants determining the contract for failure on the part of the claimant to proceed regularly and diligently with the work.  The defendants had a number of cross-claims, which exceeded the total amount due and unpaid.

Clause 27.6.5.1 of the JCT effectively provided that in the event of determination of the employment of the contractor, the employer did not have to make any further payment to the contractor, except in respect of any amounts which the employer had unreasonably not paid and which had accrued 28 days or more before the date of determination of the contract.  This was the same clause that was under the spotlight in Melville Dundas v Wimpey (please click here to read a summary of that decision).

Issues

There were two issues before the court:

(i) Whether clause 27.6.5.1 fell outside s.111 of the HGCRA, because it purported to allow sums to be withheld without the serving of a withholding notice; and

(ii) If not, whether the defendants were prevented from resisting the claimant’s application for the sums due under the contract on the basis that those sums had been “unreasonably not paid” by the defendants.

Decision

Issue 1

The House of Lords decided in Melville Dundas that clause 27.6.5.1, the effect of which was to permit withholding of payment without the issuing of a valid withholding notice, did not fall foul of s.111 of the HGCRA either on the basis that the contractor was insolvent (therefore it was no longer necessary to ensure cashflow to the contractor and the Insolvency Rules applied) and/or it would have been impossible to serve a valid withholding notice.  HHJ Coulson QC considered that a clause either complied with s.111 or it did not – he was not prepared to draw distinctions depending on the set of facts before him.  On that basis, he decided that he was bound by the House of Lords: clause 27.6.5.1 was compliant with s.111 and, in principle, this meant that the employer was entitled to withhold payment on determination of the contract for default of the contractor.

Issue 2

Clause 27.6.5.1 provides an exception in relation to amounts properly due to be paid by the employer to the contractor which the employer had unreasonably not paid and which had accrued 28 days or more before the date of determination of the contract.

It was common ground that sums were properly due to be paid and had accrued over 28 days before the determination of the contract.  The defendants sought to argue that the sums were not “unreasonably not paid” on the grounds that the reasonableness should be assessed at trial, not when the sums became payable, so that all of the defendants’ cross-claims could be taken into account.

HHJ Coulson QC squarely rejected this argument.  He considered it unattractive to allow a party to say that, even though he had been in breach of contract, subsequent events entitled him to escape the obvious consequences of that default.  Further, he found that the proviso was clearly intended to provide a limited benefit to the contractor.  Since in practice there are always cross-claims on determination of a contract, if the defendants’ submissions were correct, it would mean that the contractor would inevitably on each occasion be deprived of the benefit of that proviso.

In conclusion, the court found that the claimant was entitled to summary judgment for the full amount claimed.

This summary was provided by CMS Cameron McKenna LLP.

For more information visit http://www.cms-cmck.com/Construction/Construction-Disputes

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