In a decision handed down last week, the Court of Appeal has given a broad interpretation to the JCT provisions dealing with suspension of payment following contractor insolvency. The decision also provides notable commentary on the effect of a failure to serve Pay Less Notices in the context of a winding up petition.

Wilson and Sharp Investments v Harbour View Developments

Harbour View (“the Contractor”) was employed by Wilson and Sharp (“the Employer”) under two building contracts for the development of student accommodation in Bournemouth. Both contracts were subject to the JCT Intermediate Building Contract with contractor’s design (2011). In August and September 2013, four interim certificates were issued by the contract administrator totalling £1.2 million. One of the four interim certificates was paid, but the sums in the three remaining certificates remained outstanding after the final dates for payment. The Employer did not issue Pay Less Notices. 

The Contractor suspended its services, and it was common ground that the contract was subsequently terminated in late January 2014 when both parties served notices of termination. The Contractor notified its intention to present a winding up petition against the Employer and on 24 April 2014, the Employer issued an application for an injunction to restrain the Contractor’s winding up petition. 

Prior to the hearing, the Contractor’s own solvency position deteriorated. The Contractor put forward proposals to its creditors for a CVA (a process intended to rescue a business), but this was rejected. On 2 July 2014 the Contractor gave notice that a meeting of creditors was to be held on 11 July 2014 for the purposes of appointing a liquidator. 

At the hearing on 10 July 2014, the Judge dismissed the Employer’s application for an injunction, finding against the Employer on the following two grounds in particular: 

  1. The applicable JCT terms with regard to suspension of payments following contractor insolvency were in the Judge’s view limited to insolvency situations arising prior to termination of the contract and did not therefore assist the Employer.
  2. The Employer submitted expert quantity surveying evidence to show that the four interim certificates were significantly overvalued and that in fact a net amount was owing to the Employer. The Judge relied on the Employer’s failure to serve Pay Less Notices and its acceptance that the interim certificate amounts were due to the Contractor to conclude that this evidence did not amount to a serious and genuine cross-claim sufficient to prevent the presentation of a winding up petition.

The Employer appealed.

Suspension of payment under the JCT

The Court of Appeal disagreed with the Judge’s conclusion as to the JCT provisions. The particular clauses in question import the House of Lords decision in Melville Dundas v George Wimpey and give effect to section 111(10) of the Construction Act (as amended). They read as follows: 

“Insolvency of Contractor

8.5.1 If the Contractor is Insolvent, the Employer may at any time by notice to the Contractor terminate the Contractor's employment under this Contract. 

8.5.3 As from the date the Contractor becomes insolvent, whether or not the Employer has given notice of termination [8.5.3.1] clauses 8.7.3 … shall apply as if such notice had been given … 

8.7 If the Contractor's employment is terminated under clause 8.4, 8.5 or 8.6 … [8.7.3] no further sum shall become due to the Contractor under this Contract other than any amount that may become due to him under clause 8.7.5 or 8.8.2 and the Employer need not pay any sum that has already become due … [8.7.3.2] if the Contractor, after the last date upon which [a Pay Less Notice] could have been given by the Employer in respect of that sum, has become insolvent within the meaning of clauses 8.1.1 to 8.1.3.”

The Court of Appeal disagreed that these provisions were to apply only where insolvency occurs prior to termination of the contract or for situations in which the contract is terminated for insolvency. The clause was sufficiently clear in the Court of Appeal’s view that insolvency occurring at any time would suspend payment to the Contractor regardless of the absence of any Pay Less Notices.

Failure to serve Pay Less Notices

The Court of Appeal also disagreed with the Judge’s approach to the Employer’s cross-claim. The fact that the Employer had accepted that amounts were due under the interim certificates in the absence of Pay Less Notices was not something which affected the genuineness of the Employer’s cross-claim for the re-valuation of those certificates. The Court noted in particular: 

“Similarly, the fact that an employer accepts that interim payments have become due, because of a failure to serve a Pay Less Notice, is not prejudiced by such acceptance when it seeks to raise a serious and genuine cross claim … the fact that interim payments [have] fallen due under the HGCRA, by reason of a failure to issue a Pay Less Notice, [does] not preclude the employer from challenging the valuation at a later date or raising a cross-claim in response to a winding up petition.” 

The Court of Appeal’s comments in this regard are potentially significant in the context of the broader debate over the effect of failures to serve Pay Less Notices. We have previously reported on a run of three cases (Harding v Paice, ISG v Seevic and Galliford Try v Estura) in which the TCC has not permitted parties to challenge the valuation of interim payments in circumstances where Pay Less Notices have not been issued (see our last Law-Now on the topic here).  An appeal in the first of these cases is due to be heard by the Court of Appeal later this year.

Conclusion and implications

This decision provides authoritative guidance as to an important aspect of the JCT form. Parties faced with potential termination scenarios under the JCT would be well advised to take into account the broad application of the suspension of payment provisions upheld by the Court of Appeal. The potential for insolvency and its impact on the enforceability of payment obligations will often have significant financial consequences for both parties. 

The Court of Appeal’s comments in relation to Pay Less Notices is likely also to provoke further debate as to the effect of Pay Less Notices more generally pending its decision in the Harding v Paice appeal. 

References:

Melville Dundas Ltd v George Wimpey UK Ltd  [2007] UKHL 18;

Harding t/a M J Harding Contractors v Paice and another [2014] EWHC 3824 (TCC);

ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC);

Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC); 

Wilson and Sharp Investments Ltd v Harbour View Developments Ltd [2015] EWCA Civ 1030.