Construction contract — JCT standard form — Provision for interim payments — Appellant employer failing to make payment — Contract subsequently determined on grounds of respondent contractor’s administrative receivership — Whether recovery of payment barred under terms of contract — Whether contractual provisions contrary to Part II of Housing Grants, Construction and Regeneration Act 1996 — Appeal allowed
The appellant was the employer and the respondent was the contractor under a contract for the construction of a housing development in Glasgow. The contract incorporated the JCT standard form of building contract with contractor’s design (1998 ed). Pursuant to clause 30 of those provisions, the respondent applied to the appellant for an interim payment of £396,630 to be paid within 14 days. The parties did not dispute that the respondent was entitled to that sum. The appellant failed to pay within the required time. A few days later, the respondent went into administrative receivership and the appellant determined the contract on that ground. That triggered clause 27.6.5.1, which provided that, subject to the provisions of clause 27.6.5.2 regarding the making up of an account, “the provisions of this contract which require any further payment… to the contractor shall not apply” save in respect of certain payments that had accrued 28 days or more before the first date upon which the employer could have given notice to determine the contractor’s employment.
The respondent brought an action to recover the interim payment. It conceded that if clause 27.6.5.1 applied, it barred recovery. However, it contended that clause 27.6.5.1 was invalidated by Part II of the Housing Grants, Construction and Regeneration Act 1996, since: (i) it was contrary to a contractor’s entitlement, under sections 109(1) and 110(1), to receive payment by instalments or stage payments pursuant to an adequate contractual mechanism; and (ii) the appellant had not given notice of an intention to withhold payment pursuant to section 111(1). The respondent argued that the provision in section 109(2), allowing the parties to agree the circumstances in which payments became due, did not extend to an agreement as to the circumstances in which payments that had become due would cease to be due. Judgment was given for the respondent in the courts below. The appellant appealed.
Before the House, the respondent sought to withdraw its concession as to the effect of clause 27.6.5.1, arguing that since the employer’s liability for the interim payment had already accrued by the time the contract was determined, it was not a “further payment”.
Held: Lord Mance and Lord Neuberger dissenting: The appeal was allowed.
(1) The words “any further payment” in clause 27.6.5.1 were unqualified and had the effect that a contractor could not require its employer to pay any more money, pending the making up of the account regarding the consequences of determination pursuant to clause 27.6.5.2. The respondent’s interpretation of clause 27.6.5.1 involved impermissibly reading in the words “not already due”; if those words were read in, the remainder of clause 27.6.5.1, permitting a contractor to recover certain sums that were properly due, would be redundant.
(2) No conflict arose between clause 27.6.5.1 and the requirements of sections 109 and 110(1) of the 1996 Act. Those sections were intended to introduce clarity and certainty as to the terms of a construction contract, but did not impose any substantive requirements as to what those terms should be other than that the contractor was entitled to payment by instalments and an adequate mechanism should be in place for determining what it was entitled to be paid and when. Where a contract was determined owing to the appointment of receivers, parliament had not intended that the losses should be borne by the employer. If the employer retained the interim payment, it could set it off against its cross-claim for damages for non-completion of the contract, but if it paid the money, it would be swept up in the bank’s floating charge and the employer would have to prove in the liquidation for its cross-claim. Clause 27.6.5.1, by giving the employer a limited right to retain funds by way of security for its cross-claims, discouraged employers from retaining interim payments against the possibility that the contractor might become insolvent at some point in the future, while also preventing the interim payment system from being used to improve the position of an insolvent contractor’s secured or unsecured creditors against the employer.
(3) The appellant’s failure to give notice under section 111(1) of its intention to withhold the interim payment did not prevent it from withholding that payment under the terms of clause 27.6.5.1. The purpose of the statutory notice requirement was to enable a contractor to know immediately and with clarity why a payment was being withheld. Where clause 27.6.5.1 applied, the contractor would already have been given notice of why the payment was being withheld by means of the notice of determination, but, because of the retrospective operation of the clause, it would not have received that notice within the time stipulated in section 111(1). Parliament could not have intended to nullify clause 27.6.5.1 by providing a notice requirement with which the employer could not comply. Section 111(1) should be construed as not applying to a lawful ground for withholding payment where it was not, in the nature of things, possible for notice to have been given within the statutory time-frame.
Robert Akenhead QC and Sean Smith (instructed by MacRoberts, of Glasgow) appeared for the appellant; Robert Howie QC and Jonathan Lake (instructed by Maclay Murray & Spens, of Edinburgh) appeared for the respondent.
Sally Dobson, barrister
