When you send your builder a notice saying you aren’t going to pay the full amount asked for, do you have to say what you’re withholding the money from? Well, it depends on the contract …

Be very, very careful when reading case No 28 in our Construction Act series. It is called Strathmore Building Services Ltd vs Colin Scott Greig t/a Hestia Fireside Design. It was decided by Lord Hamilton in the Scottish Court of Session on 25 May 2000. It contains a trap for the unwary client. That’s not to say the judge went wrong; no, no, it means the decision relates to a particular Standard Form Contract, being JCT Works Contractors Design 1998. While it was the Scottish edition, the same misunderstanding applies to the English edition. The case focuses on the payment notice – the one I call the amber notice, or the notice of withholding. It is the one mentioned in section 111 of the act. It is troublesome.

Here is some background. Hestia Fireside entered into the WCD contract with Strathmore Building for its new showroom, office block and workshop in East Lothian. Interim payments were made. On completion in August, Hestia’s agents wrote to the builder saying it calculated that £40 379 was due under the contract. So far, so good. Then the letter complained about lateness plus costs or losses to do with building control. The upshot was that it would pay a mere £4971.

All went quiet until November. The builder sent in his application for a balance of £41 277. Note the date. Hestia said it phoned the builder straightaway to quarrel with the application and point to its letter of August giving notice of sums due against the account. By the way, the builder was out, so Hestia’s man left a message saying all this to the telephonist.

By February, the builder’s application was not paid. So it bypassed adjudication, went straight to court and sought summary judgment. Its case was simple. The Construction Act applied. That act says the contract will provide for a new device called a withholding notice, which must be used with strict rules if the payer wishes to withhold monies from sums otherwise due. Since no such notice (the amber notice) had been received, tough on the payer – he must pay up.

The WCD contract says that, no later than five days before the cash is finally due (the final date for payment), the employer should give notice to the contractor specifying any amount proposed to be withheld from the amount due. Hestia had two replies to this. It said it gave notice orally following the application, and it gave notice last August in its letter about delays and losses.

My tip is to read the contract document carefully, because that is what judges tend to do

The judge thought that an oral notice was not sufficient. Words in the act such as “a notice”, “an effective notice” and “specify” were a strong indication of a written notice. But, when it came to the letter of August, was that effective even though it was sent before the application for payment by the builder? The act and WCD contract give a clear latest date for sending the amber withholding notice, but is silent on the earliest date. So, if you make an application to me in June for the June valuation, but I sent you a withholding notice in May, is it OK to withhold?

The judge said no. He explained that section 111 of the Construction Act provides a statutory mechanism on compliance with which a party otherwise due to make payment may withhold such payment. “It clearly in my view envisages a notice given under it being a considered response to the application for payment, in which response it is specified how much of the sum applied for it is proposed to withhold and the ground, or grounds, for withholding any amount. Such a response cannot in my view effectively be made prior to the application itself being made.”

The trap I talked about at the beginning – and which Hestia fell into – is that under WCD it is possible to get stuck with the builder’s bill as the amount due.

Under the act, the amber notice is only required to identify the amounts being withheld, and the grounds. But what are you withholding from? The act and JCT-type documents say you withhold from the amount due. Ordinarily, an application is not the amount due, unless it is calculated in accordance with the rules of the contract. But in the WCD contract there is a quirk. The application matures into the amount due if the employer does not promptly make a counter calculation. If you say what you are withholding from in the amber notice, that counts as a counter calculation.