Kim Hong-Ji
REUTERS | Kim Hong-Ji

Remember: the grounds for withholding must be valid

Or should that be “The return of the pink socks”?

I appreciate that many of you won’t thank me for mentioning Christmas now that the new year is upon us, but the courts provided us with some last minute reading in the week leading up to… the end of Advent.

Not only did the Court of Appeal hand-down the eagerly awaited appeal judgment in Lanes v Galliford Try (which Matt discussed last week), but the TCC also handed-down three judgments, the most interesting of which (to construction dispute practitioners) was Leander Construction v Mulalley

A very brief summary

  • Mulalley employed Leander as the groundworks, frame and external works sub-contractor at a site in Lewisham.
  • During the course of the sub-contract works, Mulalley contended that Leander was in delay and had therefore breached its implied obligation to proceed with its works regularly and diligently.
  • Mulalley argued that it had incurred losses of around £131,000 and it sought to withhold this sum from interim payments (prior to the sub-contract completion date) by way of withholding notices.
  • Leander started a claim in the TCC under CPR Part 8, arguing that there was no implied obligation for it to proceed regularly and diligently. The withholding notices were therefore invalid.
  • The TCC was asked to determine whether there was such an implied term. Coulson J found that there wasn’t and therefore Mulalley was not entitled to withhold the sum of £131,000.

I urge you all to read the PLC update on the case. It provides an excellent summary of Coulson J’s sound reasoning as to why there was no implied term for Leander to proceed regularly and diligently. The case is also another good example of the effective use of CPR Part 8, particularly to get around the implications of a Tolent clause in the sub-contract.

Valid grounds for withholding?

However, I don’t want talk about implied terms, Tolent clauses or using Part 8. Instead, I want to talk about the ultimate question that Coulson J was asked to answer, which he set out in paragraph 3 of his judgment:

“The agreed position, therefore, is that if I concluded that there was no such [implied] term, then the withholding notices would be invalid and Mulalley would not have been entitled to withhold the sum of £131,078.12. If, on the other hand, I concluded that there was such a term, then… Mulalley would be able to withhold their arguable entitlement to the £131,078.12.”

In a nutshell then, if the ground for withholding was invalid, then the withholding notices themselves would be invalid.

Coulson J has addressed this question of validity before, in Windglass Windows v Capital Skyline Construction. In that case he said that there was no meaningful distinction between a “valid” notice and an “effective” notice. Therefore, in order to be effective, the notice had to set out valid grounds for withholding.

At the time, Windglass prompted debate and analysis of section 111 of the Construction Act 1996 (as enacted). For example, John Redmond (writing in Building on 4 September 2009), was of the view that the ground for withholding can be manifestly wrong, but that does not stop the withholding notice satisfying the requirements of section 111. John gave an amusing example:

“If money is being deducted because the subcontractor’s foreman wore pink socks, so be it. That is unlikely to be a good contractual argument, but it’s a valid notice of withholding. To challenge it, the subcontractor must argue that pink socks have no contractual significance, that the foreman wasn’t wearing them, and if he was, the main contractor hasn’t suffered any loss.”

The point that John was making was that the sub-contractor must dispute the merits of the withholding and not the validity of the withholding notice.

However, I think the TCC’s position is now clear: the grounds for withholding must be valid in order for the withholding notice to be effective. It is certainly worth practitioners remembering this when:

  • Advising payers who wish to withhold. The grounds for withholding must be valid in order to comply with section 111.
  • Advising payees who wish to recover monies withheld. If the grounds for withholding are invalid (for example, because the sub-contractor’s foreman wore pink socks) then the withholding notice might not comply with section 111 and it can be challenged.

I will leave you with this question:

“Will the same principles apply to “pay-less notices” under the Construction Act 1996 (as amended)?”

Answers on a postcard please (or post a comment below).

2 thoughts on “Remember: the grounds for withholding must be valid

  1. Not a postcard or an answer! Great blog, and it occurs to me that your question begs another one! As pay-less notices refer to the amount due (rather than payable) then can they have anything to do with ‘withholding’ in the sense of the Act before the amendments?

  2. Whilst I agree with the proposition that to make a withholding you needed both a right to withhold and to have issued a valid withholding notice, I have some difficulty with the concept that the validity and effectiveness of the notice are identical.

    Consider the example of the WHN that withheld £100k in respect of genuine defects, and a further £100 in respect of the foreman’s pink socks. Now in that situation, I would argue that the notice is valid (but only effective with respect to the defect). I think it would be a remarkable result if the notice was invalidated by virtue of a single defective ground, and I am not sure that this was the intention of Windglass.

    The distinction is perhaps largely a semantic one, but significant.

    As for pay less notices, my first reaction is that it would be opening a whole new can of worms to invalidate a pay less notice on the grounds that the basis on which it is calculated is wrong. If you were to reject a pay less notice because it included an invalid deduction, then the same principle would apply to certificates and default notices. In my experience, the actual sum due almost always lies somewhere between what the subcontractor asks for and what the contractor is willing to pay. Applying a strict definition of Windglass would most likely result in the notices on both sides being invalidated.

    In that situation you would end up with no valid notified sum. That cannot be what Parliament intended.

    Where I suspect you will end up, is that you will not be able to argue later a basis for the sum due other than that which has been notified.

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