| Date | 24 October 2001 |
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| Judgment | Millers Specialist Joinery Company Limited -v- Nobles Construction Limited, TCC 13 August 2001 |
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| The Issue | The effect of Section 110 and 111, payment and withholding notices. |
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| Implication |
In certain circumstances, it may be necessary to issue a valid withholding notice to establish an entitlement to reduce the value of work carried out. |
printThe requirement under the Housing Grants, Construction & Regeneration Act for the paying party to give payment and withholding notices has been at the heart of many disputes which have arisen since coming into force of the Act. Section 110(2) of the Act requires the paying party to give a notice not later than five days after the date when a payment becomes due, specifying the amount of the payment and the basis on which the amount is calculated. Section 111 provides that a party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract, unless it has given an effective notice of intention to withhold payment. The recent case of Millers Specialist Joinery Co -v- Nobles Construction examined these provisions. The case adds to the debate concerning the manner in which payment and withholding notices should be operated in practice. One issue which has caused some difficulty is whether the absence of a payment or withholding notice causes the "amount due" to be fixed by the application for payment put forward by the contracting party. Some adjudicators appeared to believe this to be the case and faced with a situation where notices had not been given by the paying party, would routinely order payment on the basis of the sum applied for without further inquiry. In S L Timber -v- Carillion Lord MacFadyen concluded that this was wrong: "a failure to give a Section 110(2) notice does not in any way, or to any extent, preclude dispute about the sum claimed". Moreover, in Lord MacFadyen's opinion, the absence of a valid notice of intention to withhold payment did not release the party making the claim of the ordinary burden of showing that it is entitled under the contract to receive the payment it claims. In Millers Specialist Joinery, Judge Gilliland QC at least agreed with this latter proposition: "Parliament could have provided that the result of a failure to serve a notice under Section 111 was to deprive the paying party of any right to challenge the amount of the payment actually due under the contract, but in my judgment clear words would be required to produce that result. The language of Section 111 does not, in my judgment, compel that conclusion. It is dealing only with the right to withhold payment and not with what is due under the contract". Against these two cases, it is difficult now to understand why some adjudicators were so determined in their view that the absence of a payment notice precluded the paying party from disputing the amount due. Unfortunately, this does not bring an end to the debate. A closely related question is, what is meant by the term to "withhold". It is readily accepted that a withholding notice is required if the paying party intends to "set off" (deduct or withhold) monies incurred as a consequence of the other party's breach. It is not so clear whether a withholding notice is equally required in circumstances where the paying party merely contests the amount due. This would occur, for example, where the paying party contends that there has been a previous overpayment. The courts had been divided on how to approach this question. Judge Bowsher, in Northern Developments -v- J & J Nicholl and in Whiteways -v- Empressa Castelli, held that there was to be no distinction between set-offs and abatements. In other words, a Section 111 withholding notice must be given if any withholding is to be made. It would not matter whether the disputed monies concerned a cross claim, for example for liquidated damages, or whether it concerned an argument that there had been an overpayment on previous applications. In contrast to this view, in Woods Hardwick -v- Chiltern Air Conditioning, Judge Thornton QC held that it is not necessary to have a Section 111 notice for the purpose of an abatement. On this view, if the disputed monies can be said to be not "due" under the contract, it is not necessary to make a withholding. In Millers Specialist Joinery, Judge Gilliland QC preferred Judge Bowsher's approach: "an abatement normally involves a breach of contract on the part of the contractor and is in the nature of a cross claim which operates to reduce the amount which can be recovered. It is not, in substance, different from a set-off". He concluded therefore that the complaint by Nobles Construction, that there had been an overpayment, could only be taken into account provided it had first served a Section 111 withholding notice. It required to serve a withholding notice to recover monies which were alleged to have been overpaid on previous invoices. Perhaps it is significant that Judge Gilliland was concerned with a number of invoices, each apparently raised separately in respect of different elements of the works. It is possible to conclude that Judge Thornton's view is the correct analysis in a situation where, under a typical construction contract, interim valuations are made according to the gross value of work carried out to the date of the valuation, with the value of that work being determined afresh each month. This conflict may eventually have to be resolved by the Court of Appeal. Simply put, if the paying party believes that it has overpaid on a contract, must it make a withholding in order to resist any further claims for payment? At present, no one seems to have a definite answer.
CJ-0142
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