In the last edition of Building Blocks, Ed Callaghan commented on the House of Lords case of Melville Dundas Limited (in receivership) v George Wimpey UK Limited (2007). In this case, the courts had decided that there was an exception to the rule that a party to a construction contract may not withhold payment that would otherwise be due, unless it had given what is known as a withholding notice within the required timeframe.

The exception, as set out by the Melville Dundas case, was where there was a contractual entitlement not to have to make payment. This case dealt with a provision in the 1998 JCT with Contractor’s Design form of contract, which enables an employer under a building contract to determine the contract when a contractor becomes insolvent.

The JCT form provides that an employer who determines the contract because of the insolvency of the contractor does not have to make payments that are due to the contractor if they fell due less than 28 days before the employer first had the right to determine the contract. In the Melville Dundas case the court held that the employer did not have to make payment in this situation, even though no withholding notice had been served.

There has already been a decision which has followed Melville Dundas, namely Pierce Design International Limited v Mark Johnston and Another (2007). In this case it was made clear that the Melville Dundas case is not limited to cases where a contractor becomes insolvent, but applies to any contractual provision that entitles the paying party not to make payment following determination of the contract.

The second consultation paper on the Housing Grants, Construction and Regeneration Act has introduced a late amendment to deal with the Melville Dundas case. The proposal is that the service of a withholding notice should be necessary if payment is to be withheld, in all cases save for insolvency.