The contract provided for interim payments by way of a detailed code. VHE sent interim application No 4 to the employer, RBSTB. It was for £883 317.49 + VAT. The employer ought to have responded with a written notice indicating what payment it proposed to make, and the basis for it. I call this the green notice. Nothing came – no notice, no cheque. VHE called for an adjudicator. Chris Linnett was appointed. The employer argued that the money was not due because a "proper" valuation had to be done.
Mr Linnett took counsel's opinion. He decided that because the employer had failed to send the green notice, VHE was entitled to the sum for which it had applied, because that is what was said in the contract. So VHE was entitled to £883 317.49 + VAT.
But now the employer called for an adjudicator. It wanted application No 4 to be opened up, reviewed and revised. It believed the VHE application was too high. Mike Standinger was appointed.
Wait a minute, why didn't the first adjudicator examine VHE's application No 4? The reason is that he had no jurisdiction. Mr Linnett was asked to decide whether the main contractor's application was payable without a green notice or calculation by the employer. That was the full extent of his remit. He could not go on to have a look at the make-up of VHE's claim. That is why another adjudication was called for.
Mr Standinger took interim No 4 apart. He announced that it was worth only £254 831.00. If the £883 317.49 + VAT had been paid, VHE was liable to repay the difference between the two. Are you keeping up?
The employer then claimed that VHE was guilty of completing the contract late. It wanted to withhold £208 000.00 liquidated damages from the £254 831.00 due under the second adjudication decision. VHE protested; it said that the right to withhold required what I call an amber notice. This must be issued five days before the final date for payment and was now said to be too late.
If you fail to send the proper notice of withholding, you cannot circumvent the act and still withhold the money
Notice that VHE was not arguing about the rights and wrongs of being late; that could keep. The issue was whether the amber notice was essential, and, if it was, whether it was issued on time. If no amber "withhold notice" was given, no liquidated damages could be withheld now.
It is at this point that lawyers' hearts begin to beat a tad quicker. They will have been speculating on whether money could be withheld, despite absent amber notices, under "set-off" procedures. The judge was clear. If you fail to send the proper and effective notice of withholding (the amber notice), you cannot circumvent an act of parliament and withhold the money. So, if you want to withhold money from sums otherwise due you have one route – the amber notice under S111 of the act. And remember, the notice has to be served before the final payment date. How long before varies; in JCT81, it is five days.
This is another case where the court had to examine whether a second adjudicator had intruded on territory previously occupied by the first. The second referee cannot change the decision of the first. But if Mr Linnett said £883 317.00 was due in valuation No 4, how come the second referee, Mr Standinger, could bash it down to £254 831.00? After all, the rule is that an adjudicator's decision is binding until decided by a court or arbitrator or agreement.
The first referee was only authorised to deal with the technical correctness of notices. His authority/jurisdiction could have been extended voluntarily by both parties. Instead the employer chose another referee.
The notice to withhold the liquidated damages technically failed, because it was too late. But it could be issued again or used to withhold against next month's valuation of sums otherwise due. That's no good, of course, if no more money is due. In that sort of case, the employer would have to adjudicate on the real issue of who was responsible for being late.
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or e-mail him on firstname.lastname@example.org.