Court warns non-payers

Payment disputes involving a failure to provide a valid withholding notice under the terms of the Construction Act are now more likely to go to court than adjudication.

This is the conclusion of Liverpool solicitor Hill Dickinson following a decision in the Salford Technology and Construction Court.

Alan Pugh, a solicitor in the firm's construction department, said: "In light of the judgment, parties who claim an entitlement to payment due to a failure to provide a valid withholding notice may well prefer to commence court proceedings rather than proceed to an adjudication, given the availability of cost orders and statutory interest."

The Salford court ruled that, irrespective of whether the defendant had justifiable reason for withholding monies, the claimant was entitled to summary judgement requiring payment on the grounds that there was no withholding notice.

Rudi Klein, chief executive of the Constructors Liaison Group, said the Salford decision was in line with a similar ruling by the Chancery Division of the High Court. He added: "The courts are firing a warning shot across the bows of non-payers. You fail to issue a withholding notice giving reasons for non-payment at your peril. Many people in the industry still seem to think the Act does not apply to them. Either that or they are just ignorant of the Act."

In the Salford case, subcontractor Millers Specialist Joinery Company commenced proceedings and issued an application for summary judgment on the basis of 10 unpaid invoices submitted for work carried out at the Triangle, Manchester.

Judge Gilliland QC considered the application both on its merits and in the light of the client's failure to provide valid withholding notices. In the first instance he found the claim would have failed "because it cannot be said that the defendant did not have a reasonable prospect of establishing that it had a valid counter-claim which under the general law it could rely on as an equitable set-off".

However, summary judgement was awarded on the grounds that no valid withholding notice was given under Section 111 of the Construction Act.

The judge stated: "The effect of Section 111 is to prevent the paying party, if it does not give appropriate notice, from exercising his right to retain or withhold payment of monies which would otherwise be due and payable but for the existence of some right to withhold payment. Section 111 refers to withholding payment generally.

"It must have been intended to include situations where the paying party was legitimately entitled under the general law under the terms of the contract to withhold monies which were otherwise payable."

David Oram, a partner in the Hill Dickinson construction team, concluded: "In view of this decision, there may be a marked increase in the number of such disputes proceeding immediately to court and a likely decrease in adjudications."