The short answer to this is yes…in limited circumstances.
This question was the main issue considered in Melville Dundas Limited v George Wimpey (UK) Limited, a case which hit the headlines in April 2006 as it was the first time that the Housing Grants Construction and Regeneration Act 1996 had been considered in the House of Lords.
Melville had applied for an interim payment on 2 May with the final date for payment falling on 16 May. Wimpey failed to pay by 16 May and failed to serve a withholding notice. On 22 May, Melville went into administration and on 30 May, Wimpey terminated the building contract. Melville’s receivers brought proceedings against Wimpey to recover the sum applied for by Melville on 2 May.
Melville relied on s.111 of the HGCRA: “A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective notice of intention to withhold payment”.
Wimpey, however, relied on clause 18.104.22.168 of the building contract (JCT 1998 With Contractor’s Design) which provided that where the employer determined the employment of the contractor as a result of a default on the contractor’s part or the appointment of administrative receivers, “…the provisions of the contract which require any further payment…to the contractor shall not apply”.
The Court dealt with this apparent conflict between s.111 and the JCT clause by stating that s.111 “should be construed as not applying to a lawful ground for withholding payment of which it was…not possible for a notice to have been given in the statutory time frame.” The House of Lords held (albeit not unanimously) that Wimpey had been entitled to withhold the money from Melville.
At the time, this decision gave rise to concerns that employers would be able to use termination to avoid making interim payments. However, these concerns were quickly allayed in July 2007 as Judge Coulson in the TCC was given an opportunity to consider the Melville decision in slightly different circumstances.
The case was Pierce Design International Limited v Mark Johnston and Another. Johnston had engaged Pierce under a JCT 1998 With Contractor’s Design contract, but following slow progress from Pierce, Johnston stopped making interim payments, failed to issue any withholding notices and eventually terminated the contract.
Pierce raised a similar s.111 versus JCT clause argument to the one that had been considered in the Melville case. The Judge concluded that the operation of clause 22.214.171.124 was not limited to insolvency cases and he was therefore bound by the House of Lords’ decision on that point.
However, Pierce also relied on the proviso contained within clause 126.96.36.199 which states that the operation of the clause should not prevent the contractor receiving any payment that it is due and which the employer has “unreasonably not paid” more than 28 days before the termination. The Judge held that since Johnston had not served a withholding notice, the sums due to Pierce had been “unreasonably not paid” and Johnston was not able to rely on the clause to escape payment.
In summary, whilst the answer to the opening question can be yes in certain cases of insolvency, the important point for payers arising out of the Pierce case is that Melville does not seem to have the wider application it was initially feared it would have. It merely provides an employer with a possible safety net where circumstances conspire to make it impossible for him to comply with the statutory framework for issuing a withholding notice. Consequently, payers cannot rely on termination to avoid making interim payments without issuing a withholding notice. Accordingly it is still necessary to issue a timely withholding notice should you wish to withhold monies from any applications for payment under a building contract.