HGCR ACT 1996 – WITHHOLDING PAYMENT

SUMMARY

Section 111(1) of HGCR Act 1996 makes the giving of notice a condition precedent to a right to withhold payment beyond the final date for payment for construction contracts under the Act. To be effective the notice must be given in time and state the amounts and the grounds for withholding. To play safe a Witholding Notice should be given even for matters of abatement i.e. sums not becoming due in the first place.

1. RIGHT TO WITHHOLD PAYMENT – SECTION 111

Section 111(1) of HGCR Act 1996 makes the giving of notice a condition precedent to a right to withhold payment beyond the final date for payment for construction contracts under the Act. Such rights include the right of set-off. It is not clear whether it includes the right of abatement of price, or whether that right is to be exercised under Section 110(2) only.

Section 111(1) provides that the notice in Section 110(2) may suffice as notice of intention to withhold payment if it complies with Section 111.

Section 110(2) notice is 5 days after payment becomes due.

Section 111(2) defines effective notice. Such a notice must specify:

• the amount proposed to be withheld and the grounds for withholding payment, or
• if there is more than one ground, each ground and the amount attributable to it,

and must be given not later than the prescribed period before the final date for payment.

Section 111(3) provides that the parties are free to agree what the prescribed period is to be. In the absence of such agreement, the period shall be that provided for by the Scheme for Construction Contracts.

2. THE SCHEME FOR CONSTRUCTION CONTRACTS

Paragraph II.10 provides that the length of the prescribed period in Section 111(3) is 7 days before the final date for payment.

3. THE NATURE OF THE STATUTORY RIGHT TO WITHHOLD PAYMENT

A. Set-Off and Abatement

It is suggested that the Act has not changed the substantive legal basis on which a payer can reduce the amount of the payment due, but simply introduced a statutory procedural requirement for effective notice before the right can be exercised. If there is no substantive legal basis for withholding payment, then the issue of the notice will not create such a right. The validity of the ground for withholding may therefore be in dispute and resolved by adjudication, but there can be no procedural objection if the requirements for Section 111 Notice have been complied with.

The payer has the substantive right to withhold payment includes an adjustment to take into account the reduced value of the work due to defects. This is referred to as abatement of the price and arises from the breach of contract in providing defective work. The payer may also wish to deduct sums from the amount claimed for other breaches such as late completion. This is referred to as set-off. Both the right of abatement and the right of set-off could always be exercised by a payer at any time and in any proceedings unless such a right was excluded by the terms of the contract, usually by means of a notice provision. In addition the right to set-off against an application for payment was restricted by the Courts to only those breaches which were so closely connected to the application for payment that it would be manifestly unjust to enforce payment without taking into account the set-off Hanak -v- Green (1958). In addition where the claims on both sides are for payment of debts and where the sums are readily ascertained, set-off is allowed as a particular type of defence.

B. Caselaw

There have been numerous cases dealing with Section 111 Notices. Three cases are given below which demonstrate the Court’s approach to the operation of Section 11 Notices on the right to payment.

In Palmers Limited v ABB Power Construction Limited (Aug 1999) TCC it was found that the sum due under the contract was £172,572.25 and should have been paid by 10th July 1999. ABB made intimations of set-off by letters dated 5th and 8th July 1999. It was held that the notices served by ABB did not constitute effective notices since neither identified any amount which it is proposed to be withheld. Thus, since the final date for payment had passed and since no effective notice of withholding could now be served, the sum of £172,572.25 was due and owing to Palmers and could not now be the subject of any set-off by ABB.

In VHE Construction plc v RBSTB Trust Co Ltd (13 Jan 2000) it was held that unlike Section 110, Section 111 had direct application, except in leaving it to the parties to specify the prescribed period. The first issue was whether Section 111(1) excluded the right to deduct money in exercise of a claim to set-off in the absence of an effective notice of intention to withhold payment. It was held that it did and that that was one of its principal purposes. Section 111 was directed to providing a definitive resolution of the debate. The words “may not withhold payment” were ample in width to have the effect of excluding set-offs and there was no reason why they should not mean what they say. Section 111 constitutes a comprehensive code governing the right to set-off against payments contractually due.

In Northern Developments (Cumbria) Limited v J&J Nichol (24 Jan 2000) TCC His Honour Judge Bowsher QC considered the operation of Section 111. He held that the Act by Section 111 imposed on the parties a direct requirement that the paying party may not withhold a payment after the due date for payment unless he has given an effective Notice of Intention to Withhold Payment. Section 110 required that the contract must require that within 5 days of any sum falling due under the contract, the paying party must give a statement of the amount due or of what would be due if the payee had performed the contract. Section 111 provided that no deduction can be made after the final date for payment unless the paying party has given notice of intention to withhold payment. The intention of the statute was that if there was to be a dispute about the amount of the payment required by Section 111, that dispute was to be mentioned in a notice of intention to withhold payment. The general scheme of the Act was a temporary arrangement which did not prevent the presentation of other set-offs, abatements, or indeed counterclaims at a later date by litigation, arbitration, or adjudication. For the temporary striking of balances which was contemplated by the Act, there was to be no dispute about any matter not raised in a notice of intention to withhold payment.

4. THE REQUIREMENTS FOR EFFECTIVE NOTICE

Caselaw

In the scottish decision in Strathmore Building Services Ltd v Colin Scott Greig (2000) Crt of Session the main issue was whether Section 111 Notices are required to be in writing and whether a notice issued before the application for payment is effective.

It was held that the purpose of section 111 was to provide a statutory mechanism on compliance with which, but only on compliance with which, a party otherwise due to make a payment may withhold such payment. It clearly envisaged a notice giving under it being a considered response to the application for payment, in which response it was specified how much of the sum applied for it was proposed to withhold and the ground or grounds for withholding any amounts. It was held that such a response could not effectively be made prior to the application itself being made. It may be that the matter of withholding payment of any sum which might in the future be applied for had previously been raised. In such circumstances a notice in writing given after receipt of the application but which referred to or incorporated some earlier written communication might suffice for the purpose although Lord Hamilton reserved his opinion on that matter. It was held that such an earlier written communication, whether alone or referred to subsequently in an oral communication, could not suffice. This as a matter of statutory interpretation was unmistakably the case.

5. ABATEMENT AND NOTICE OF WITHHOLDING

Caselaw

Although it is now clear that a Section 111 Notice is required in order to properly withhold payment for set-off, the Courts have been less clear to decide whether a Section 111 Notice is required for an abatement of price. The law has developed through six decisions below.

Case 1. In Woods Hardwick Ltd v Chiltern Air Conditioning (2000) TCC the usual issues of notice of withholding and abatement of price arose. His Honour Judge Thornton QC stated that “Any abatement, properly relied on by Chiltern, would not of course be caught by Section 111 of the HGCRA, so Chiltern’s abatement defence could, in principal, defeat or reduce Wood Hardwick’s claims”.

Case 2. In KNS Industrial Services (Birmingham) Limited v Sindall Limited (July 2000) TCC His Honour Judge Humphrey Lloyd held that the term “withhold” is used in Section 111 of the Act to cover two situations. The first is where the contractor had not taken account of a countervailing factor in arriving at his declared valuation. The second situation is where there is to be reduction in or deduction from an amount that had been declared or thought to be due. Judge Lloyd considered that in the former case the word “withholding” may not always be correct for as he put it, one cannot withhold what is not due.

This part of the judgment is difficult to understand fully. It appears to suggest that the contractor may value of the works by making adjustments for items of work which have not been carried out at all, or for works which have not been carried out properly. If he does not do so when declaring his valuation, the contractor may subsequently give notice of withholding for such matters under Section 111. In other words the contractor can carry out a gross valuation and then give notice of withholding for incomplete or improper work, or he may carry out a valuation net of such work. The question which then arises is what happens if the contractor does not make a valuation or give a notice at all? Can the adjudicator include such matters in his decision on the true value of the valuation?

KNS submitted that the Adjudicator did not have jurisdiction to reduce the gross valuation for “non-compliant work” and relied upon Judge Bowsher’’s decision in Northern Developments (Cumbria) Ltd v J & J Nichol that “there is to be no dispute about any matter not raised in an intention to withhold payment. … the adjudicator had no jurisdiction to consider any matter not raised in the notice of intention to withhold payment…”.

Judge Lloyd held that this was a misreading of the extract. In this case Judge Humphrey decided that he could not safely conclude that the Adjudicator had accepted KNS gross valuation as the true value of the works and then made deductions from it. It was possible for instance that the deduction for “non-compliant work” might mask matters which would affect the valuation.

It appears therefore from this part of the decision that where the issue of the valuation of the works has been referred to the Adjudicator, that he can decide the value of the work properly carried out and reduce the gross valuation for non-compliant work even in the absence of an effective notice. Such a deduction is an integral part of valuation and does not require an effective notice under Section 111. This simply follows common sense.

Case 3. In Whiteways Contractors (Sussex)Limited v Impresa Castelli Construction UK Limited (Aug 2000) TCC His Honour Judge Bowsher Q.C.held that it did not matter whether these deductions were by way of set-off or abatement, the Act required notice of such deductions. He held that the Act made no distinction between set-offs and abatements and there was no reason why it should have done so. Judge Bowsher saw no reason to strain the language of the Act to find some distinction between its applicability to abatements as opposed to set-offs.

He held that in considering a dispute, the Adjudicator will make his own valuation of the claim before him and in doing so, he may abate the claim in respects not mentioned in the notice of intention to withhold payment. Judge Bowsher gave an example. If there is a dispute about Valuation 10, the Adjudicator may make his own valuation of the matters referred to in Valuation 10 whether or not they are referred to specifically in a notice of intention to withhold payment. But it would be wrong for him to enquire into an alleged over-valuation on Valuation 6, whether the paying party alleges abatement or set-off, unless the notice of intention to withhold payment identified that as a matter of dispute.

Case 4. In Discain Project Services Ltd v Opecprime Development Ltd (9 Aug 2000) the Adjudicator decided that the Notice of Intention not to Pay was not good Section 111 notice, because the section does not allow notices to be given by a party who was not a party to the contract. In this case the Notice did not come from Opecprime but from Miltonland Limited. Opecprime was part of the Corner Group of Companies and some of the personnel were involved in more than one company. The result was that communications which would be expected to come from Opecprime came from other companies such as Miltonland. Discain were aware of this. It was normal for correspondence to be headed on the headed paper of a company other than the appropriate company, but everyone understood what company was involved. His Honour Judge Bowsher QC stated that if he were sitting as an appeal judge he would differ with the Adjudicator, however he was not and the decision was binding on the parties.

Case 5. In SL Timber Systems Limited v Carillion Construction Limited (27 June 2001) Court of Session Lord Macfadyen held that the absence of a timeous notice of intention to withhold payment does not relieve the party making the claim of the ordinary burden of showing that he is entitled under the contract to receive the payment he claims. It remains incumbent on the claimant to demonstrate, if the point is disputed, that the sum claimed is contractually due. If he can do that, he is protected, by the absence of a Section 111 notice, from any attempt on the part of the other party to withhold all or part of the sum which is due on the basis that some separate ground justifying that course exists. If the section did require a notice of intention to withhold payment as the foundation for a dispute as to whether the sum claimed was due under the contract, it would be relatively straightforward for the party disputing the claim to give such a notice. But that consideration does not justify ignoring the fact that the section is expressed as applying to the case where an attempt is made to withhold a sum due under the contract, and not as applying to an attempt to dispute that the sum claimed is due under the contract. There is no difficulty for an adjudicator in reaching a provisional determination of a dispute as to whether the sum claimed is due under the contract. That is what the adjudicator would require to do if the party disputing the claim on the basis that the sum claimed was not due under the contract gave a notice of intention to withhold payment on that ground.

Case 6. In Millers Specialist Joinery Company Limited v Nobles Construction Limited (August 2001)TCC Judge Gilliland referred to and agreed with the decision of HH. Judge Hicks Q.C. in relation to set-off in VHE Construction Plc. v. RBSTB Trust Co. Limited [2000] BLR 187,192. It was clear from this decision that “the final date for payment of a sum due under the contract” may exist although technically if a valid notice had been given the paying party would have been entitled to exercise a right of retention or to withhold the sum in question and thus not have been obliged to make the payment.

Judge Gilliland held that the failure to serve an effective notice did not have the result that the amount of the valuation is to be treated as the amount which is “due under the contract” within Section 111(1).

Judge Gilliland agreed with HH.Judge Bowsher Q.C. in Whiteways Contractors (Sussex) Limited v Impresa Castelli Construction UK Limited that no distinction should be drawn between matters of abatement and matters of set-off and that a notice must be given under Section 111 if monies were to be withheld from sums which would be payable but for the set-off or abatement. The question was a matter of substance and not of legal form or technicality. It did not follow that merely because an abatement may technically reduce the amount due and payable under the contract that Parliament was to be taken to have intended that the amount claimed could not be challenged if no notice was given under Section 111. An abatement normally involved a breach of contract on the part of the contractor and was in the nature of a cross claim which operated to reduce the amount which could be recovered. It was developed by the common law as a procedural means whereby justice could be done as between the parties without the need for the defendant to bring a cross action. It was not in substance different from a set-off.

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