Won't pay? Must pay

You've probably read quite a lot about adjudication over the past few months, but please don't stop reading yet. This case on the enforcement of an adjudicator's decision raises important issues about payment in cases of alleged defects, defaults or previous overpayment.

In the recent case of Whiteways Contractors (Sussex) Limited versus Impresa Castelli Construction UK Limited, the claimant (Whiteways) was the plastering subcontractor engaged by the defendant contractor (Impresa) under a contract which contained a provision for adjudication.

Whiteways started one adjudication, in which they were awarded £100 000. Impresa paid up. Then, a couple of months later, Whiteways started a second adjudication. Impresa was ordered to pay a further £80 000 to Whiteways. Impresa declined to pay.

Impresa said that the adjudicator had dealt with matters which had not been referred to him, and so had exceeded his jurisdiction. However, Impresa's solicitors had written to the adjudicator asking him to decide on his own jurisdiction. The adjudicator had decided, and therefore Impresa was stuck with the decision.

If Impresa had wished to challenge jurisdiction, and keep the issue alive for another day (ie in court), Impresa should have raised its objection but not asked the adjudicator to decide. The moral here is: if you do not want to be bound by an adjudicator's decision on a particular issue, do not ask the adjudicator to decide it.

The second adjudication
In the case of the second adjudication award, Impresa raised the question of Whiteways having been overpaid on previous applications. This was because Whiteways had apparently not installed some fittings for which it had been paid, and had applied an excessive mark-up. Impresa argued that, because the sums in respect of the fittings and the mark-up had never become due, it could withhold payment to the same extent.

This second argument is very important. Under the Housing Grants and Regeneration Act 1996 (HGCRA), sections 110 and 111, the paying party has to give notice, with reasons, if it intends to withhold payment.

Lawyers sometimes draw a distinction between set-offs and abatements. This is a complex and confusing topic. Both involve a paying party not paying a claim. Basically, a set-off is said to arise where there is a counter-claim very closely connected with the claim, or where there are claims from the opposing parties, both of which can be readily quantified in financial terms.

An abatement is said to be available where the paying party's claim (withholding of money) is based on defective work, or the fact that work was not done in the first place. In the case of an abatement, it is said that money has not become due.

It was argued on behalf of Impresa that, because (assuming Impresa was correct) the money was not due to Whiteways in the first place, Impresa had not been obliged to serve a Notice of Withholding, and therefore did not have to pay. However, the Judge took a different view.

"It is common for a party to a building contract to make deductions from sums claimed on the Final Account (or on earlier interim applications) on account of overpayments on previous applications" he said. "It makes no difference whether those deductions are by way of set-off or abatement.

"The scheme of the HGCRA is to provide that, for the temporary purposes of the Act, notice of such deductions is to be made in a manner complying with the requirements of the Act. In making that requirement, the Act makes no distinction between set-offs and abatements. I see no reason why it should have done so, and I am not tempted to strain the language of the Act to find some fine distinction between its applicability to abatements as opposed to set-offs." The judge went on to look at the adjudicator's position. "Of course, in considering a dispute, an adjudicator will make his own valuation of the claim before him. In so doing, he may abate the claim in respects not mentioned in the notice of intention to withhold payment. He ought not to look into abatements outside the four corners of the claim unless they have been mentioned in a notice of intention to withhold payment.

"To take a hypothetical example, if there is a dispute about valuation 10, the adjudicator may make his own valuation of the matters referred to in valuation 10 whether or not they are referred to specifically in a notice of intention to withhold payment. But it would be wrong for him to enquire into alleged over valuation on valuation 6, whether the paying party alleges abatement or set-off, unless the notice of intention to withhold payment identified that as a matter of dispute." In other words, this judgment appears to mean that each valuation must be treated separately, and that in any valuation (including the final account) the paying party is not entitled to withhold payment, whatever the reason, without a notice of withholding.

What this ruling means
It must be said that this judgement has caused some dispute, with doubts being raised as to precisely what was decided (and whether the judge was right). Arguably, a paying party does not have to serve a notice to withhold if the basis for withholding payment is that the work provided has been defective.

It is likely that this issue, and precisely what sections 110 and 111 of the HGCRA mean, will come before the courts again, and some more light may be shed. In the meantime, if you are in the position of making payment, but you consider that the work done has been defective, it would be prudent to issue a notice of withholding, within the time limit set out by the Act.

If you are in the position of seeking payment, and payment is not made (without a proper notice of withholding) and the payer then argues that abatement does not require notice, this case can be used to cast considerable doubt on that argument.