The wrong tool for the job

In January, Rupert Choat suggested that the Construction Act had become something of a lawyers’ playground. A recent decision has highlighted the dangers of playing in the wrong ground.

Moorside Investments vs DAG Construction was handed down in the High Court just before Christmas. It was decided not by the Technology and Construction Court (TCC) but by a judge of the Chancery Division.

And that’s really the problem. Neither the lawyers arguing the case nor the judge deciding it appear to have referred to all of the relevant (although admittedly confusing) set of rules governing the Construction Act.

The facts form a common or garden tale of construction woe. DAG was the contractor and Moorside the employer. DAG made a number of interim payment applications. Moorside, asserted counterclaims for the cost of rectifying defective work and damages for delay. The counterclaims exceeded DAG’s claims and Moorside refused to pay. However, Moorside didn’t back up the counterclaims with withholding notices, so DAG sought payment.

Most people in DAG’s position would have commenced adjudication proceedings which they would then have looked to enforce in the TCC, if necessary. This would have had the advantage of having the case heard by one of the judges who has established the plethora of rules governing the act. Instead, DAG issued winding up proceedings under the insolvency regime.

The basic principle underlying both individual and corporate insolvency is that non-payment of a certain amount (£750) is treated as evidence of insolvency. There is one key distinction: the debt must be genuinely undisputed (often even trivial disputes are sufficient to get around this test). DAG was effectively asserting that the lack of a valid withholding notice meant that the debts were undisputed. Moorside disagreed and it was Moorside’s application to restrain DAG’s winding up petition that was heard by the judge. There was one more quirk: by the time of the hearing, DAG had itself become insolvent.

Users of the courts are entitled to expect cases to be decided in the proper forum and according to established law.

The judge had to consider three points. First, was the contract sufficiently evidenced in writing for it to be caught by the Construction Act? Second, did the lack of a withholding notice mean that Moorside had effectively lost the right to raise defences of set-off and counterclaim. Third, what was the effect of DAG’s own insolvency?

At the risk of asserting that some of the established rules are clear, and assuming that the judge accepted the contract was sufficiently evidenced in writing to be caught by the act (in fact it may not be) the answers are:

• The lack of a withholding notice meant Moorside could not withhold payment
• The money was payable to DAG but any payment should be stayed, pending an assessment of the counterclaim
• If a balance was still due to DAG, and it exceeded the £750 threshold, there was nothing to stop DAG's petition.

But what the judge decided was:

• The question of whether or not the contract was sufficiently in writing to comply with the Construction Act was a red herring
• This is because the act - in particular the provisions regarding withholding notices - did not alter Moorside's underlying right to raise a defence of set-off and a counterclaim
• DAG's own insolvency was therefore not relevant and Moorside’s application for an injunction was granted.

Users of the courts are entitled to expect cases to be decided in the proper forum and according to established law – there is binding Court of Appeal authority on what is and is not a contract in writing and on the consequences of failing to serve a withholding notice to which the judge should have been referred.

The fact that the judge happened to reach the right decision (don’t wind up Moorside until its counterclaim has been assessed) is a quirk of fate arising from DAG’s own insolvency and not legal planning.

The TCC judges know the law because they have decided it. Choose your court wisely.