A party that doesn’t want to pay another needs to issue a withholding notice with a reason why it’s not paying – but does this reason need to be reasonable?

Most readers of this column will know the meaning of the term “withholding notice” and understand its significance. In fact, most readers will probably have given one, or received one, or both. Despite that, many people seem a little shaky about what has to go onto them. And there is a danger that a recent decision of the Technology and Construction Court will make matters worse.

To recap, the Construction Act 1996 had all sorts of things to say about payments under construction contracts. In particular, if a paying party wants to pay less than the sum due under the contract, it must give written notice to the payee of its intention. If it fails to do so, it must pay the full sum without the deduction.

There are rules about what has to go into the notice. Section 111(2) of the act says that to be effective the notice must specify the amount to be withheld and the ground for withholding. If there is more than one ground, each must be stated and the amount attributable to it. Nothing else is required.

This apparently simple requirement was discussed in Windglass Windows vs Capital Skyline Construction, a case heard before Mr Justice Coulson in July.

Windglass had a contract for the supply and installation of windows doors and suchlike at a project in London. It did what it said it would, and asked to be paid. In fact it made two applications for payment, totalling some £166,000.

Capital Skyline didn’t pay anything at all. It responded to each application with a letter explaining that its financial director had rejected it because it was not in the company’s standard format and had insufficient supporting information. Capital Skyline said that the letters were effectively withholding notices, and therefore it did not have to make the payments.

Windglass went off to adjudication. The adjudicator decided that the withholding notices were not effective as they did not set out the grounds for withholding. He also decided that there was no contractual obligation to make the applications for payment in any specific format. He said Capital Skyline should pay.

If money is being deducted because the subcontractor’s foreman wore pink socks, so be it. That is unlikely to be a good contractual argument, but it’s a valid notice of withholding

It didn’t, so Windglass went to court to enforce the decision. Capital Skyline tried to run the same argument, but failed – which is not terribly surprising. Whether or not the notices were effective was an issue put before the adjudicator and he had decided it. That was enough to mean that the defence was bound to fail – the adjudicator’s decision was binding.

But the judge went a little way further.

He said: “I do not accept the suggestion that section 111 of the 1966 act and the relevant part of the scheme do not require a withholding notice that sets out valid grounds for withholding money otherwise due.”

Those words might lead the reader to conclude that if the notice contains grounds, but the grounds are not valid, the notice isn’t valid either.

This is a problem that crops up quite often in adjudication. Typically, a main contractor has withheld a sum from an interim payment to a subcontractor. The notice of withholding states that the sum being withheld is, say, £10,000. The grounds for withholding are that the subcontractor has caused delay to progress on the main contract.

The subcontractor is absolutely sure that the delay was caused by someone else, and takes the matter to adjudication. It explains that the main contractor has not even attempted to demonstrate that the delay was caused by the subcontractor, nor provided any evidence of loss resulting from the delay. It says therefore that the notice is not valid and the sum deducted must be paid. It thinks that the argument is so strong that it does not bother making a case that it did not cause delay – it relies on the lack of detail in the withholding notice.

Adjudicators may have a good deal of sympathy for this argument, but cannot help. A notice that states the sum to be withheld and the ground for withholding is a valid notice. The “ground” can be manifestly wrong, but that does not stop it from being a ground and so satisfying the requirements of the act. If money is being deducted because the subcontractor’s foreman wore pink socks, so be it. That is unlikely to be a good contractual argument, but it’s a valid notice of withholding. To challenge it, the subcontractor must argue that pink socks have no contractual significance, that the foreman wasn’t wearing them, and if he was the main contractor hasn’t suffered any loss.