The House of Lords recently handed down its first judgment interpreting the Housing Grants Construction and Regeneration Act 1996. The decision, in Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd, by a three-to-two majority, was unexpected and employer-biased.

The case concerned a number of questions on the payment provisions of the Act but, of particular interest, was the Lords' decision about withholding notices, which has potentially far-reaching implications for the construction industry.

In the case, the parties entered into a standard contract which provided that if the contractor, Melville Dundas Ltd, had an administrative receiver appointed within a certain time, then the employer, George Wimpey, could determine the contractor's employment and no liability to make further payment would arise. Six days after the final date for an undisputed interim payment, the contractor went into administration and their employment was duly terminated.

The employer had not paid the contractor by the final date for payment - neither had it served a notice of withholding.

The court found that, in the circumstances, the interim payment was no longer payable and the contract wording entitling the employer not to make payment by the final date for payment was valid.

This decision goes against everything the industry has had drilled into it since the Act came into force - that if money is to be withheld, the withholding party must serve a notice to that effect.

If the final date for payment had not passed then we can argue that, as a result of the laws of insolvency, the employer should be entitled to withhold the sums otherwise due and, therefore, Section 111 would not apply.

But in this case, the final date for payment had passed and, therefore, the employer was in breach of both the Act and, for six days at least, the contract.

Section 111 prohibits the withholding of sums due after the final date for payment, unless notice is served. The contract clause in this case sought to permit that which Section 111 prohibits. The decision reached by the majority in this case, on the face of it, seems wrong. There seems no logic in ruling that Section 111 can be disregarded and certainly not in the ambiguous circumstances of this case. Business for adjudicators and the Technology and Construction Court just got better.

* Andrea Gardner is a Partner and specialist in construction law at Blackett Hart & Pratt. She can be contacted on 01325-466794