Alexander Demianchuk
REUTERS | Alexander Demianchuk

Withholding notices and adjudicators’ decisions

Last week I wrote about the severance points in Working Environments v Greencoat, but I think the withholding notice points that arise from Akenhead J’s judgment are equally interesting.

As I’m sure everyone is familiar with section 111 of the Construction Act 1996 and the requirements of a withholding notice, I’m not going to set them out here. Instead, I’m going to focus on the relationship between withholding notices under section 111 and adjudicators’ decisions.

Paying party cannot set off against adjudicator’s decision

It was way back in 2000 when the TCC was first asked to consider the relationship between withholding notices and adjudicators’ decisions. In VHE v RBSTB, HHJ Hicks QC held that the paying party could not issue a withholding notice to resist payment of an adjudicator’s decision. The withholding notice had to be effective and it could only be effective if it was issued no later than the “prescribed period” before the final date for payment.

That principle has stood the test of time with one notable exception: HHJ Francis Kirkham’s judgment in Shimizu Europe Ltd v LBJ Fabrications Ltd.

In that case, the adjudicator’s decision related to a sum that would become due in the future, as opposed to a sum that was already due. In that situation, the court held that the paying party could issue an effective withholding notice before the final date for payment. In effect, the withholding notice “trumped” the adjudicator’s decision, although that isn’t how Coulson J puts it in his book. He suggests that it was not a case of a contractual provision overriding the effect of an adjudicator’s decision, Shimizu was simply exercising a statutory right to withhold money against a sum that would become due in the future.

Why, you may ask, is this relevant to WE v Greencoat?

In WE v Greencoat, the sub-contractor started the adjudication shortly after interim certificate 10 was issued and some 22 days before the withholding notice was issued. It sought declarations regarding the amount that would be due to it in the future. The adjudicator granted a number of declarations, including the amount due under certificate 10. The adjudicator’s decision was served after the final date for payment of that certificate. This meant that the withholding notice may have been effective as against the certificate, but it could not be set off against the adjudicator’s decision because of the timing. The responding party was liable to pay what the adjudicator declared was due (subject to the severance of issues 11 and 12, which were outside the adjudicator’s jurisdiction).

This point about set off under the withholding notice wasn’t expressly addressed in the judgment. The judgment was more concerned with the adjudicator’s jurisdiction and whether he was entitled to take into account matters included in the withholding notice that the responding party had not raised earlier (the court held he wasn’t).

However, as I see it, there are parallels in WE v Greencoat with the “in the future” aspect of Shimizu. The judgment acts as a reminder that a paying party can set off in very narrow circumstances. If you are too quick to start the adjudication and seek only declarations, you may find that a withholding notice can be validly served and sums set off against the adjudicator’s decision.

Finally, I wonder if the quantum of items 11 and 12 in the withholding notice were (say) £250,000 and not £21,000, it could have been an effective way of the responding party not having to pay?

3 thoughts on “Withholding notices and adjudicators’ decisions

  1. It seems to me that, under the ‘old Act’, it will be practical for a second adjudication to be commenced by the referring party once the withholding notice is issued and, assuming the same adjudicator is appointed, for the timetable to be aligned.

    However under the ‘new Act’ it does seem to me that the issue might be quite different. If the ‘payment notice’ is disputed, and then a ‘pay less notice’ is issued (which may well be in the same terms – ie a revised assessment of the amount due rather than a ‘withholding’) – then does the ‘first’ dispute collapse on itself requiring a restart as the payment notice is effectively superseded? Or maybe it would be considered as a ‘revising’ of the position as the judge assessed the change from TBA to £120,000 in WE v Greencoat, though any ‘new’ heads would be fresh items requiring a second adjudication.

    It seems to me that maybe the judgment in WE was with this slightly in mind – to have disputes about the ‘amount due’ torpedoed resulting in a delay in the adjudicator’s decision and therefore cashflow must be contrary to the purposes of the legislation?

  2. Matt, Wait till you read Mr Justice Edwards-Stuart’s judgment in R & C Electrical-v-Shaylor !!!!!!!!

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