Adjudication: set-off and abatement

Is a party who fails to issue a notice of intention to withhold payment precluded from arguing in an adjudication that the sums claimed are not due under the contract?

A 'withholding notice', under Section 111 of the Housing Grants, Construction and Regeneration Act 1996, may be issued because of defective works, for example, or because the defendant is entitled to set-off (a counterbalancing debt pleaded by the defendant) or abatement (reduction) on other grounds.

The effect of such notices has been considered in previous cases. In VHE Construction Plc versus RBSTB Trust Co Ltd, Judge Hicks held that if no notice is issued, there can be no set-off.

It has been argued that under abatement the paying party is simply adjusting the price to reflect the true value of the work carried out and is not withholding anything from that value. In other words, the sum never became due in the first place, consequently there is no withholding and no need for a notice. Section 111 only refers to withholding of 'sums due'.

However, in Whiteways Contractors (Sussex) Ltd versus Impresa Castelli Construction UK Ltd, it was held that there should be no distinction between set-off and abatement for the purposes of the Act. A notice is required in both cases.

Recent cases
In several recent cases the question has been addressed as to whether a party who has failed to issue a withholding notice after an adjudicator has given a decision, can argue in enforcement proceedings that it is entitled to set-off/abate claims against the judgement sought.

In David Mclean Housing Contractors Ltd versus Swansea Housing Association Ltd the contractor claimed entitlement to payment of a sum which included loss and expense arising as a result of delay to completion. The adjudicator determined that the contractor was entitled to some of the loss and expense but not to a full extension of time. Under the contract, the employer was entitled to liquidated damages for delay unless an extension of time was granted.

After the adjudicator's decision, the employer issued a notice of intention to withhold payment of the amount of liquidated damages for the period for which the adjudicator had held that the contractor was not entitled to an extension of time.

In enforcement proceedings, Judge Lloyd held that the employer had a viable counterclaim for liquidated damages which should be taken into account as a set-off against the sum which the adjudicator determined was due.

Is a party who fails to issue a notice of intention to withhold payment precluded from arguing in an adjudication that the sums claimed are not due?

In Solland International Ltd versus Daraydan Holdings Ltd the defendants argued in enforcement proceedings that they had a claim which far exceeded the sum awarded to the claimant and that they were entitled to abate the sum awarded by the amount of their claim for incomplete/defective works.

Judge Seymour held that if the construction contract provides for the parties to comply with the decision of an adjudicator, the sum awarded by the adjudicator becomes payable under the contract and therefore Section 111 applies. Summary judgment was granted in favour of the claimant.

Without deciding the point, Lord Justice Pill in the Court of Appeal in Parsons Plastics (Research & Development) Ltd versus Purac Ltd also expressed the view that an adjudicator's decision that one party was to make payment to another was a "sum due under the contract" which has provided for his appointment.

In this case (to which the Act did not apply since the work was not a construction operation), the issue before the Court of Appeal was again the question of set-off. The adjudicator found that Parsons was entitled to payment for tasks completed. Parsons brought enforcement proceedings.

Purac sought to set-off the reasonable costs of paying a third party to complete the work. Parsons argued that, since Purac had failed to issue a withholding notice under the specific terms of the contract, it was not entitled to set-off. However, the contract also contained a general provision preserving Purac's equitable and common law rights of set-off.

The court held that the contractual provisions relating to withholding notices were expressly subject to the set-off provision. Purac was therefore entitled to set-off.

Proceed with caution
The Act, and therefore Section 111, did not apply in Parsons Plastics. However, for contracts to which the Act does apply, a definitive determination on the effect of failure to serve a withholding notice – both in terms of what can be argued in an adjudication and the parties' rights after an adjudication when enforcement of the award is sought – would be welcomed.