Withheld payments are a bugbear for contractors. Andrew Milner looks at a recent test case

Prior to the introduction of the Construction Act, a major source of dispute and difficulty within the construction industry was the withholding or non-payment of monies otherwise due to contractors, who would have no idea why the monies were not being paid.

It was notoriously easy for unscrupulous payers to make a sufficiently intimidating counterclaim for alleged defects or other deficiencies in the contractors’ work to ensure that the payee did not receive the payment it was entitled to.

In order to eradicate such abuse, section 111 of the Construction Act created the system of withholding notices, whereby if the payer had a genuine reason not to pay monies otherwise due, it had to spell out the reason in advance of any payment due.

Consequently the payer has no right to withhold payment of a sum that is due under the contract to a payee unless an effective notice has been given. This is a strict requirement of the Construction Act.

This is illustrated in Windglass Windows v Capital Skyline Construction (2009).

The dispute

Capital engaged Windglass to supply and install glazed windows, doors and screens at a site in London. The contract failed to provide an adequate mechanism for determining either what interim payments became due under the contract or when they became due for payment.

Accordingly, the Scheme for Construction Contracts implied the necessary terms into the contract. Notwithstanding this, there was a dispute as to whether or not Windglass had agreed to make its applications for interim payment in a particular form.

Windglass submitted two applications for payment, but because they were not made in accordance with what Capital said was an agreed format, Capital declined to make any payments to Windglass, even though the doors, windows and screens had been delivered and installed.

The payer has no right to withhold payment of a sum that is due under the contract to a payee unless an effective notice has been given

Capital issued withholding notices in respect of both applications. They stated:

“We refer to the above valuation… Our financial director has returned this application and is not willing to process this amount due to insufficient information. Please note that our company policy is such that each subcontractor valuation must be presented in a standard format… and authorised by the appropriate site manager before your application can be processed. Could you kindly re-present your application with the correct supporting information.”

Windglass referred its claims to adjudication and received a decision that it was entitled to the sums sought. Capital refused to pay in accordance with the decision and so Windglass commenced court proceedings.

The court case

Capital argued that section 111 of the Construction Act and the relevant part of the Scheme for Construction Contracts do not require a withholding notice. As long as there was something purporting to be a withholding notice, that was sufficient to justify withholding, regardless of the contents of the notice itself.

The court disagreed with Capital’s arguments because they were contrary to the express wording of section 111.

This case highlights the importance of setting out the grounds for withholding money otherwise due in a withholding notice. Any argument to the contrary will contradict section 111 and be ineffective.

Useful tips

  • Although the words ‘in writing’ are not expressly used in section 111, writing in some form is required. Phone messages, even ones referring to a particular letter of an earlier date, will not suffice.
  • A withholding notice cannot be provided prior to the making of the relevant application for payment.
  • Provided that the notice makes tolerably clear what is being withheld and why, the court will not strive to intervene or endeavour to find reasons that would render such a notice invalid or ineffective.