Q. Contractor insolvency – does the employer have to pay?
A. This point was covered in the important case of Melville Dundas Limited (in receivership) v George Wimpey UK Limited which was heard by the House of Lords on April 25th 2007.
Melville Dundas went into receivership. They had been carrying out works for George Wimpey UK Limited under a JCT Standard form of Building Contract with Contractor’s Design 1998 edition. Melville Dundas had applied for an interim payment in the sum of just under £400,000.
However, after the payment was due but before payment was made by Wimpey, Melville Dundas went into receivership and Wimpey determined Melville Dundas’ employment pursuant to clause 27 of the Contract.
Wimpey did not pay the £400,000 that was due as an interim payment and the Receivers of Meville Dundas brought proceedings against Wimpey to recover the monies. Wimpey relied on clause 27.6.5.1 of the contract which, it argued, provided that the interim payment was no longer payable. Clause 27.6.5.1 provides that the provisions of the contract which require any further payment or any release, or further release of retention to the contractor, shall not apply in the case of insolvency until the works have been completed.
The Court held that the words ‘any further payment’ in clause 27, meant ‘require the employer to pay any more money’ and this extended to an interim payment which the employer was already liable to pay under the contract before determination of the contractor’s employment.
The court then considered whether the provision in JCT clause 27 was contrary to the Construction Act and, in particular, whether Wimpey was entitled to withhold the monies despite the fact that it had not served a notice of withholding payment.
The House of Lords held that the absence of a notice of withholding did not prevent Wimpey from relying on clause 27.
Wimpey was not required to make payment, even though the monies had fallen due before the receivership.
Defective performance can reduce the amount you are paid
Q. What is abatement?
A. Not to be confused with the right of set-off, abatement is a defence to a claim for payment which can be made in respect of defective work. In essence, the common law right to reduce sums otherwise payable, by asserting that the sums claimed have not been earned.
In his judgment in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd and another [2006] EWHC 1341 (TCC), Mr Justice Jackson made a careful analysis of the law of abatement, deriving seven legal principles from the authorities he cited.
The Multiplex case related to a dispute arising from the construction of the steelwork for Wembley Stadium. Multiplex alleged extensive defects in the steel work. Mr Justice Jackson set out the following principles:
1. In a contract for the provision of labour and materials, where performance has been defective, the employer is entitled at common law to maintain a defence of abatement.
2. The measure of abatement is the amount by which the product of the contractor’s endeavours has been diminished in value as a result of that defective performance.
3. The method of assessing diminution in value will depend upon the facts and circumstances of each case.
4. In some cases, diminution in value may be determined by comparing the current market value of that which has been constructed with the market value which it ought to have had. In other cases, diminution in value may be determined by reference to the cost of remedial works. In the latter situation, however, the cost of remedial works does not become the measure of abatement. It is merely a factor which may be used either in isolation or in conjunction with other factors determining diminution in value.
5. The measure of abatement can never exceed the sum which would otherwise be due to the contractor as payment.
6. Abatement is not available as a defence to a claim for payment in respect of professional services.
7. Claims for delay, disruption or damage caused to anything other than that which the contractor has constructed cannot feature in a defence of abatement.
