FEARS have been raised by the North-East construction law sector over the future of small building contractors, following a court ruling that could take away their payment safety net.

The Construction Act has been in place since 1998, which forces employers to inform a contractor, within a timescale specified in their contract, if they do not intend to pay them at any stage and to give reasons why.

However, for the first time since the law came into force, the House of Lords has ruled in a case concerning a so-called withholding notice.

The court ruled in favour of George Wimpey UK Limited after it missed the final date for a payment and did not serve a withholding notice to contractor Melville Dundas Limited.

The contractor went into receivership six days after the payment deadline.

The court ruled that because Melville Dundas had gone on to fail, George Wimpey UK did not have to make the payment under the contract.

Andrea Gardner, a specialist construction lawyer with law firm Blackett Hart & Pratt (BHP), said the ruling had significant implications for contractors, especially smaller businesses that were already suffering from cashflow problems.

"This decision goes against everything the industry has had drilled into it since the Construction Act came into force - that if money is to be withheld, the withholding party must serve a notice to that effect," she said. "It's a principle everyone has worked to for the last decade.

"In this case the final date for payment had passed before the contractor went into receivership.

"The industry's understanding has been that, in such circumstances, the employer would be in breach of the Act, regardless of what happened to the contractor later."

Ms Gardner, based at BHP's Darlington office, said the law had previously offered protection for contractors, who could take enforcement action against the employer if they did not receive a withholding notice.

She added: "The fear is that, now a precedent has been set, employers will take advantage of it.

"If they believe a contractor is having problems with cashflow to the point where they may go into receivership, unscrupulous employers may deliberately withhold payment knowing they will get away it. It could push struggling contractors over the edge.

"It is extremely unnerving for them and goes against the whole principle of the Act."