Geoff Brewer of Brewer Consulting considers withholding of payment

What is the "withholding of a sum due" under a construction contract? Put another way, when is it necessary to serve a withholding notice in accordance with the Construction Act? This question has troubled the industry since the Act came into force. Thankfully the matter has been carefully examined on a number of occasions by the courts and it seems a clear answer is emerging.

One of the clearest comments came from Lord Macfadyen in the case of SL Timber Systems -v- Carillion Construction in June 2001, where he said: "I would have been inclined to say that a dispute about whether the work had been done, or about whether it was properly measured or valued, or about whether some other event on which a contractual liability to make payment depended had occurred, went to the question of whether the sum claimed was due under the contract, therefore did not involve an attempt to 'withhold a sum due under the contract', and therefore did not require the giving of a notice of intention to withhold payment."

The conclusion to be drawn from this and other cases appears to be that where the paying party disputes the amount properly due under the contract, there will be no requirement to serve a withholding notice. Nothing is being withheld. That principle would apply, regardless of whether the paying party was simply relying upon a contractual term for payments only to be made in respect of work properly carried out, or was relying upon a general right of abatement to take into account, for example, defective work.

Where however, the paying party seeks to resist payment by raising a counterclaim to be applied as a set-off against monies otherwise due (such as, for example, to deduct damages for delay in carrying out the work), then a notice of withholding will be required.

This interpretation appears to be perfectly straightforward, but it is in the nature of construction law that fringe arguments will always be found which will create further difficulty.

An example is to be found in the case of Clark Contracts -v- The Burrell Co (Construction Management). Clark was employed by Burrell as contractor for the redevelopment of eight flats in Glasgow under the JCT Standard Form.

An architect's interim payment certificate had been issued in the gross amount of approximately £450,000, which after deduction of retention and previous payments left a payment due of approximately £30,000. Burrell refused to pay and Clark commenced proceedings for the unpaid sum.

In placing its case before the court, Clark did not specify the works which it had performed and which underpinned its claim for payment. It simply relied upon the issue of the interim payment certificate by the architect.



Burrell disagreed with the amount certified by the architect and contended to the court that the amount stated as payable in the interim certificate was not necessarily the 'amount due' under the contract. By reference to clause 30.2 of the JCT Form, Burrell argued that the sum due under the contract derived from the gross valuation, which was defined to include the total value of the works properly executed by the contractor.

In order to arrive at this figure, the work carried out had to be assessed and valued in accordance with the Bill of Quantities. Thereafter, the architect would issue an interim certificate. What was therefore due was not necessarily what the architect said was due. The architect's view, said Burrell, was indicative only and not authoritative. The architect might get his assessment wrong and his view was not therefore binding.

Behind this argument lay the fact that Burrell had not given a notice of intention to withhold payment in accordance with the Construction Act. Burrell maintained that it was not necessary for it to do so, since Clark was not suing for a sum due under the contract. The amount brought out as payable in the interim certificate and the sum due under the contract were not necessarily the same thing. Burrell concluded in its argument that the absence of a withholding notice did not relieve Clark from the ordinary burden of showing that it was entitled under the contract to receive payment of the sum contended for.

Clark argued that this was wrong. In the absence of a notice of withholding, Clark argued it had established an entitlement to payment by reference to the architect's interim certificate.

It was not necessary to set out all of the contractual works that it had performed in the course of the contract. This would be farcical and would render the certification provisions of the contract redundant.

The court preferred Clark's argument. The SL Timber case had not concerned an architect's certificate, but simply a claim for payment by the subcontractor. In this case, Clark became entitled to payment of the sum stated in the interim certificate within 14 days of it being issued. That was an entitlement to payment of a sum due under the contract. Thus, if Burrell wished to avoid a liability to make such payment because the works did not conform to the contractual standard, or because it disputed the certification made by the architect, it would be withholding payment of a sum due under the contract. Burrell would thus be required to give a withholding notice in accordance with Section 111 of the Construction Act.