Withholding Notice in Adjudication – When is it Necessary?

Posted on 29/09/2017 · Posted in Adjudication

Disputes in the construction industry often start with the failure of one party to pay another party, or else the failure of the contract administrators to issue a certificate. As a result, disputes over interim and final payments often arise and can drag on for long stretches of time, becoming more complicated and convoluted. Sometimes the party that is due to pay up will consciously drag on proceedings in order to avoid payment.

For construction contracts entered into before 1st October 2011, Section 111 of the Construction Act 1996 requires that the paying party must issue a valid ‘withholding notice’ in order to withhold a payment under a construction contract.

The most common reason given for withholding payment by the paying party is that there are delayed damages or defects to offset against payment. Parties may also argue the right to withhold payment when they claim the unpaid balance relates to work that has not in fact been completed, or refers to duplicate work for which the claimant has already been paid.

In order to be valid, the withholding notice must specify the amount which is to be withheld and the reasons behind withholding the payment. If the paying party fails to issue a valid withholding notice then the receiving party can suspend work and refer the dispute to an adjudicator if they choose to.

Honest disagreement is often a good sign of progress.”
Mahatma Gandhi

A withholding notice also needs to be given within the time frame specified in the contract, or if this is not outlined in the contract, then within the time frame specified by the Construction Act 1996 and the associated Scheme, Paragraph 10, Part 2, ‘Any notice of intention to withhold payment mentioned in Section 111 of the Act shall be given not later than the prescribed period, which is to say not later than seven days before the final date for payment determined either in accordance with the construction contract or, where no such provision is made in the contract, in accordance with paragraph 8 above.’ If a withholding notice is not given within this time frame then the party seeking payment can demand it based on either the contract terms or, failing this, the conditions implied by the Act. In this case the paying party must pay up before being allowed to counter-claim or proceed to adjudication.

Section 111(4) of the Act also outlines the fact that even when a party has issued an effective withholding notice within the valid time frame and containing the relevant information, on the matter being referred to adjudication where the adjudicator decides that a part or all of the amount proposed to be withheld should be paid, then the party intending to issue the withholding notice cannot do so, and must pay up.

It is also worth noting that The Local Democracy, Economic Development and Construction Act 2009 has amended the Construction Act 1996. For all contracts entered into after 1 October 2011, instead of a withholding notice, a paying party must issue a ‘pay less notice’, which should specify the payment believed to be due and explain the basis upon which this has been calculated.

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