The Withholding Notice Conundrum

I am pretty sure that all the readers of this publication will know something about withholding notices. The requirement for a paying party to issue a written withholding notice where part or all of a payment is to be held back from a Contractor or Sub-Contractor is set down in Section 111 of The Housing Grants Construction and Regeneration Act 1996 (The Act).
 
 

I am pretty sure that all the readers of this publication will know something about withholding notices. The requirement for a paying party to issue a written withholding notice where part or all of a payment is to be held back  from a Contractor or Sub-Contractor is set down in Section 111 of The Housing Grants Construction and Regeneration Act 1996 (“The Act”).

 
This is what the Act says.
 

111 Notice of intention to withhold payment 
 

(1) A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective notice of intention to withhold payment.
The notice mentioned in section 110(2) may suffice as a notice of intention to withhold payment if it complies with the requirements of this section.
(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.
(3) The parties are free to agree what that prescribed period is to be.
In the absence of such agreement, the period shall be that provided by the Scheme for Construction Contracts.
(4) Where an effective notice of intention to withhold payment is given, but on the matter being referred to adjudication it is decided that the whole or part of the amount should be paid, the decision shall be construed as requiring payment not later than—
(a) seven days from the date of the decision, or
(b) the date which apart from the notice would have been the final date for payment, whichever is the later.  
 
I have deliberately underlined and made bold one word in the first paragraph of the quotation from the Act.
 
My point is, and I seem to write this a lot in Decisions, a withholding notice is not required where payment of the sum claimed is not due. What do I mean by this?
 
Let’s say that a brickwork Sub-Contractor is building a large retaining wall and deliberately claims to have completed 50% of the work in its first application for payment when it is obvious to all that only 25% of the wall has been completed. If the Contractor’s QS pays the Sub-Contractor a value equivalent to 25% of the wall does he or she need to issue a withholding notice in respect of that part of the Sub-Contractor application that he is not going to pay? The answer is ordinarily no.
 
I am being deliberately evasive on this point because it is possible to draft contracts that require a paying party to pay applications in full in the absence of a withholding notice, regardless of whether or not the value applied for represents the value of work executed, because the contract expressly states that in the absence of a written notice to the contrary the default position is that the sum applied for is the sum due. JCT 1998 With Contractor’s Design is an example of such a contract and I have also seen Sub-Contact terms drafted in such a way that if they were to be incorporated into the Sub-Contract the Contractor would become obliged, in the absence of a withholding notice, to pay a Sub-Contractor’s application in full and argue about it later. 

So far so good but what happens if a Sub-Contractor has gone into Administration, a payment has become due and you have missed the deadline for issuing a withholding notice, do you still have to pay? Well, depending on the specific wording of your Sub-Contract, possibly not.
 
Admittedly it might have been a long time ago but, when I went to University, I remember being taught that it was not possible to “contract out” of the provisions of a statute unless the statute specifically allowed you to do so. There is no “contract out” provision in The Housing Grants Construction and Regeneration Act 1996 so you would have thought that even in insolvency, no withholding notice would mean that you would have to pay a Contractor, or Sub-Contractor for that matter, a payment that had become due and payable prior to Administration.
 
This very point was considered by the House of Lords in Melville Dundas Limited (in receivership) and others (Respondents) -v- George Wimpey UK Limited and others (Appellants) (Scotland) [2007] and by a majority of 3 to 2 it was decided that Parliament had not intended to curtail the right to withhold where it had become impossible to issue a withholding notice because of some intervening event such as insolvency.
 
So, even if you forget or are unable to issue a withholding notice in the required time and your Sub-Contractor goes into Administration, you may be able to avoid paying the Sub-Contractor. But only if there are clear words in your Sub-Contract that expressly allow you to withhold all payments in the event of insolvency until such time as all works are completed on site and a full account of sums due each way can be drawn up.      

Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Joint Managing Director and Chairman of Vinden and he be contacted by email at pvinden@vinden.co.uk   
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