John Nestor considers the degree of particularity required
when specifying the grounds for withholding under section 111(1) of the Housing Grants Construction & Regeneration Act 1996.

Introduction
Section 111(1) of the UK’s Adjudication Act 1996 provides that a party to a construction contract may not withhold payment of a sum due under the contract unless he has given an effective notice of intention to withhold. To be effective, s.111(2) provides that it must specify the amount proposed to be withheld and the ground or grounds for doing so. S.111(2) also provides that the notice must be given within a prescribed period. In the absence of an effective notice, it is relatively settled law that the right to deduct money by way of withholding is excluded: see VHE Construction v RBSTB Trust [2000] BLR 187; and Rupert Morgan Building Services v Jervis [2003] EWCA Civ 1563.

Unlike s.110(2), the notice need not specify the basis on which the amount was calculated; just the amount proposed to be withheld. But it is the particularity of the grounds for withholding which can create difficulty, and on which the courts seldom, if ever, cast light upon.

There is an important distinction between ‘grounds’ and ‘reasons’, and indeed s.83 of the Act employs the distinction. Recently, the Law Commission considered the distinction in the context of bail decisions.
Paraphrasing with necessary contextual changes for withholding, they said that a ground relates to a circumstance that is capable of being relevant and sufficient to justify the act of withholding, whereas whether a ground does in fact justify the act of withholding depends on the cogency of the reasons put forward in support of it. This suggests that the inquiry into whether something is capable of justifying the act of withholding demands little more than a look at the face of the notice to see whether the specified grounds are sustainable in law.

Withholding at the payment stage
The mischief of s.111(1) is directed at the abuse highlighted by Sir Michael Latham – namely, that “main contractors were abusing their position to wrongfully withhold payment from sub-contractors who were in no position to make any effective protest.” It addresses this mischief through a notice that requires the paying party to notify the other party of his intention to withhold a specified amount on account of specified grounds.

Generally, the notice imposes a healthy discipline upon the paying party, and helps safeguard against arbitrariness.

Specifically, specifying an amount is intended to ensure that information about payment is made available to the payee earlier than it otherwise would be, and specifying the grounds is intended to enable the payee to make a proper assessment as to the validity of the withholding, and in particular, whether the withholding is one that should be challenged, and, if so, to what extent.

Withholding at the payment stage, at least in the context of set-off under a construction contract, consists of a declaration by one party that has the effect of extinguishing or reducing payment of a sum that has become due from that party to the other. Thus, it suggests an equal right to payment of the sum set-off, and therefore leans on validity.

If, because of lack of particularity, the payee cannot make an assessment about its validity, or whether it should be challenged and, if so, to what extent, the notice has not achieved its intended purpose. In these circumstances, it would not, in my view, be an effective notice within the meaning of s.111(2).

However, this begs the question: what is needed to make a proper assessment?

Although the particularity required is clearly a question of degree, it could be argued that all that is required to constitute an effective notice is a concise statement of fact asserting breach and a concise statement of fact linking the specified amount to the breach. It seems unlikely that basic causes of action will do, not least because statutes which require the giving of grounds often stipulate them and the Act does not stipulate the grounds for withholding, which seems to suggest that, unlike basic causes of action, the grounds are not susceptible to formulaic expression.

The relative ease by which a party may withhold payment from another is somewhat startling, particularly because the authorities suggest, albeit in the context of quantification rather than grounds, that the party withholding does not default by withholding a greater sum than can ultimately be established on subsequent information, provided he quantifies his loss by a reasonable assessment made in good faith. 

In a recent paper, HHJ Thornton QC seems to suggest that this issue could and should be covered by an ethical code, thereby acting as a necessary and useful adjunct to the Act. However, the real obstacles facing the compilers of a code, as identified by HHJ Thornton QC, suggest that it is at best a distant prospect. Perhaps, therefore, the Society of Construction Law should consider providing ad-hoc guidance on this and the many other issues identified by HHJ Thornton QC in his paper.

Withholding when referring to adjudication
Set-off is a species of withholding, and in legal proceedings it is taken as a point for the defence. When taken, a defendant must state the material facts on which he relies in support of the set-off with the same particularity as he would if he were a claimant in an independent action bringing a claim. Furthermore, the defendant must adduce evidence to prove the facts that he relies on. 

By analogy, this also applies to adjudication, notwithstanding that the adjudicator may take the initiative in ascertaining the facts and law. Therefore, the burden of proving that the grounds for withholding are valid (which also means justifying the grounds by way of reasons) falls upon the party who withholds. He cannot merely rely on the issue of an effective notice, because it is clear that a party to a construction contract may refer to adjudication the withholding of a sum of money under a construction contract even if the notice of withholding is effective – see s.111(4) of the Act. 

Although adjudication is a welcome step in that a dispute about withholding can be referred for adjudication and a decision made within 28 days, the ease by which a party may withhold from another, which very often is the catalyst for adjudication, is or should be a matter for concern.

John Nestor is a Senior Consultant and is based at Trett Consulting’s London office