Melville v Hotel Edinburgh

The part of the settlement agreement between the employer and the contractor by which a specified sum was to be withheld from the contractor until a specified date and released on that date subject to various conditions did not constitute a construction contract
 
MELVILLE DUNDAS LTD v HOTEL CORPORATION OF EDINBURGH LTD

Scotland, Outer House, Court of Session
Lord Drummond Young
15 September 2006
 
A settlement agreement was reached between the employer and the contractor to resolve a defects dispute by which a specified sum was to be withheld from the contractor until a specified date subject to various conditions. The employer refused to release the sum and the contractor brought proceedings to recover it. One of the contractor's submissions was that if the employer wished to withhold payment of a sum certified as due to the contractor, it had to give an effective notice of intention to withhold payment under section 111 of the Construction Act insofar as the sum withheld under the agreement was due and the employer sought to withhold payment on the basis of other defects in the works. The employer's response was that the settlement agreement was not a "construction contract" for the purposes of the Construction Act with the result that the contractor's submission should be rejected.
 
Lord Drummond Young agreed with the employer and held that the settlement agreement did not constitute a construction contract for the purposes of the Construction Act on the basis that it instead constituted an independent settlement of a discrete element in the parties' disputes that was not referable to the (original) construction contract but rather stood by itself. The contractor would therefore (had it so chosen) not have been entitled to bring an adjudication where the dispute was that the employer wrongfully failed to comply with section 111. It was nevertheless important to draw a distinction between this type of settlement agreement and a "settlement agreement" that (1) merely determined sums due under the construction contract and (2) had no existence independent of that contract. An example of a "settlement agreement" merely determining sums due under the construction contract was one that the amount of the contractual retention under a construction contract should be fixed at a specified sum where all that the parties had done was to agree a particular sum relevant for the purposes of the construction contract on the basis that the agreement would be given effect through the mechanisms available under the construction contract.