Too late to notice

Before the arrival of the Housing Grants Construction and Regeneration Act 1996, the ability of the construction industry to come up with reasons for non payment knew almost no bounds. Whilst some contracts endeavoured to prevent the wrongful withholding of monies due, the contractual and legal systems appeared to be unable to seriously affect parties to a construction contract who were determined, sometimes on the flimsiest of grounds, to withhold payment.

Change in the law
Since the change in the law, a combination of the availability of adjudication and the requirements placed on parties under the payment provisions have significantly moved the goal posts. The key positions in relation to payment are to be found in sections 109 to 111 inclusive of the Housing Grants Construction and Regeneration Act 1996. These in effect provide mechanisms for payment and also, critically, mechanisms for notices of intention to withhold payment.

There is no substitute for reading the contract (or alternatively the Act and the Scheme under the Act) in order to identify, before commencement of any contract, (and ideally before submission of tender where applicable) the payment terms under the contract. This seems simple and obvious advice, but the increasing number of adjudications where such information seems to have been ignored suggests neglect of the requirements governing payment procedure.

The right to withhold payment fell into two categories: abatement and set off. In very simple terms, abatement allows a party to defend a payment action by deducting against price the difference between the value of the work and materials at the date supplied, and their value had they not been defective. Set off permits the deduction of an actual claim of losses against the other party's claim for and entitlement to monies. Unlike the defence of abatement, set off can constitute both a defence and a counterclaim. Prior to the recent legislation, abatement and set off formed the basis of the right to withhold payment. The use of a combination of set off and abatement was a fairly popular way of arguing against monies due under interim and indeed final valuations, even if at the time the valuation was submitted no prior notice of these arguments had been provided.

Things have changed dramatically. A combination of section 111 and recent case law makes it perfectly clear that for a party to successfully withhold payment it must have given effective notice of intention to withhold. To be effective, such a notice must specify the amount supposed to be withheld and the grounds for withholding payment or, if there is more than one ground, each ground and any amount attributable to it. This notice must be given not later than the prescribed period before the final date for payment.

Should a party seeking recovery of monies choose to adjudicate purely on the limited issue of non payment of an interim valuation against which there has been no valid notice to withhold, then the likelihood is that the application will succeed. There are a number of ways to limit the risk of falling foul of the notices requirement. No doubt some of you out there have already thought of all of them, and probably more, but here are my suggestions.

Make sure you are fully aware of the requirement for procedures within the contract or legislative scheme and comply with them to the letter

Limiting risk
Make sure you are fully aware of the requirement for procedures within the contract or legislative scheme and comply with them to the letter.

Ensure that in relation to a number of contracts between the same parties on a different project you are clear as to the rights of set off as between the different contracts. If necessary, seek advice as to how to deal with this issue to provide maximum protection within the require-ments of the legislation.

Do not take the view that just because there is no written detailed contract the requirement to serve notice does not apply.

If you are hit with an adjudication purely on an interim valuation on the basis of failure to serve notice of set off, at least put your house in order regarding future notices as and when appropriate.

If there is strong evidence of breaches of contract by the parties seeking payment, you may have to start your own separate adjudication and do your best to catch up with your opponents' adjudication.