The House of Lords has caused concern among sub-contractors by allowing a housebuilder to withhold payment from a payee without issuing a withholding notice. The ruling, the first on the Construction Act in the House, sided with George Wimpey & Norwich Union against sub-contractor Melville Dundas, overturning an earlier ruling by a lower Scottish court. The decision undermines a central tenet of the Construction Act protecting sub-contractors from payment abuse. Melville Dundas applied for the interim payment of around £400,000 on May 2, 2003, as part of a housebuilding contract in Glasgow. The final date for payment was May 16, 2003. Wimpey served no valid withholding notice and under the terms of the JCT Standard Form of Building Contract with Contractor’s Design (1998) Melville Dundas was entitled to the full amount. However, Melville Dundas went into receivership on May 22, 2003, and Wimpey, using clause 27.6 of the JCT 98 form, which allows a client to terminate a contract with a sub-contractor on the basis of insolvency, suspended the payment. This triggered a legal claim by Melville Dundas, claiming that section 111 of the Housing Grants, Construction and Regeneration Act 1996 [the Act], which guarantees payment if a valid withholding notice is not issued, overrode the insolvency clause. The House of Lords found in favour of Wimpey by a majority of 3:2. The ruling could set a precedent for lower courts, and suggests that a contractor could deny payments without issuing a withholding notice, and await the collapse of the sub-contractor before terminating the contract. John Millar, lawyer at Fenwick Elliott said: “I am surprised by the ruling. If contractors don’t give a withholding notice, then payment should be at least semi-automatic, but what this ruling is saying is that is not the case. “I advised a sub-contractor in a similar situation last week and to say he’s worried is the understatement of the year. It certainly contradicts the Act and seems to allow contractors to use insolvency to abuse their position and not pay sub-contractors.” The HVCA said the case was worrying, but that the ongoing parliamentary review of the construction industry represented an opportunity to address the loophole. Rod Pettigrew, head of commercial and legal at the HVCA said: “We are concerned with the broad interpretation of section 111 of the Act, which potentially could significantly weaken the efforts of legislation to protect sub-contractors’ payment rights. “We will raise the issue as part of the ongoing inquiry into construction and we would expect Government to make sure any potential loophole is closed.” The SEC Group has written a letter the DTI to protest this interpretation of the law.