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Construction & Engineering

Pay Less Notices & Withholding Payments

It is worth remembering that when the Housing Grants Construction and Regeneration Act 1996 was amended, there was more than just a change in terminology from Withholding Notices to Pay Less Notices.

Section 111 (as amended) provides:

‘(3) The payer or a specified person may in accordance with this section give to the payee a notice of the payer's intention to pay less than the notified sum.
(4) A notice under subsection (3) must specify—

(a) the sum that the payer considers to be due on the date the notice is served, and
(b) the basis on which that sum is calculated.

It is immaterial for the purposes of this subsection that the sum referred to in paragraph (a) or (b) may be zero.’

Prior to the 2009 Act amendments, the forerunner was more complex:

‘(1) A party to a construction contract may not withhold payment…unless he has given effective notice of intention to withhold payment…

(2) To be effective such a notice must specify—

(a) the amount proposed to be withheld and the ground for withholding payment, or
(b) If there is more than one ground, each ground and the amount attributable to it, and must be given not later than the prescribed period before the final date for payment.’

The requirements for Withholding notices led to much angst over what ‘effective’ meant, and the requirements for Pay Less notices are arguably simpler. Now, the payer needs to set out ‘the basis on which that sum is calculated’, rather than containing every ground and making attribution of figures to them. There is no case law on the content of Pay Less notices yet, and not that much on the detail of Withholding notices either. However, what case law that does exist concerning Withholding notices suggests that judges were not keen to construe section 111(2) as rigorously as they might.

In Thomas Vale Construction Plc v Brookside Syston Ltd [2006] EWHC 3637 (TCC), in which Thomas Vale sought to challenge an adjudicator’s decision and with it the content of withholding notices served by Brookside to resist payment of £57,425, HHJ Kirkham’s judgment set out the content of the notice:

“The Employer is entitled to withhold a sum for the cost of making good the outstanding defects and completing incomplete work (pursuant to the contract or its common law rights). The Employer relies on the independent report of Jonathan White, a quantity surveyor, which demonstrates that the cost of making good/remedying outstanding defects and completing incomplete work will exceed the amount of the Interim Certificate.”

However, Brookside’s quantity surveyor had identified £168,144 as the cost of remedying defects and completing work, and his report had been disclosed, so the work and its cost were clear. Helpfully, HHJ Kirkham said:

“It does not seem to me to be appropriate to construe the withholding notice as nicely as TVC seek to do. In my judgment it would be inappropriate to apply fine textual analysis to a notice which is intended to communicate to the other party why a payment is not to be made. It is clear that BSL withhold payment because (as TVC do not challenge) TVC have not completed work or remedied defects.”

In Aedas Architects Ltd v Skanska Construction UK Ltd [2008] CSOH 64 the Court of Session Outer House in Scotland held that Withholding notices would be ‘effective’ even where they attributed the whole figure to be withheld to all of the grounds relied on, i.e. the deduction of a global figure against all of the grounds complied with the requirement for attribution.

In Letchworth Roofing Company v Sterling Building Company [2009] EWHC 1119 (TCC), Sterling resisted enforcement on natural justice grounds, because the adjudicator displayed scant regard to Sterling’s defence. He did so because he decided Sterling’s withholding notice was invalid. Coulson J summarised the adjudicator’s findings on the withholding notice thus: “… it did not state the amount to be withheld; it did not give grounds for the withholding; and it was outside the prescribed timeframe.” Coulson J agreed with the adjudicator’s assessment of the withholding notice and upheld his decision.

In Leander Construction Limited v Mulalley and Company Limited [2011] EWHC 3449, ‘fine textual analysis’ was also resisted and Coulson J (again) said “….the court will take a practical view of the contents of a withholding notice and will not allow complaints as to form which might be described as artificial or contrived.”

There is a beauty in the simplicity of the three criteria in Letchworth and, given the TCC judges’ statements on what constituted a sufficient Withholding notice, it is logical to suggest these inspired the simpler formula for Pay Less notices provided for in the amendments. The simplicity of the Pay Less notice means it is easier to raise defences and exercise rights of set-off in such a way that they can be deployed in adjudication.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice. 

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