Jams and pile-ups ahead

We all know what happens when traffic lights fail. I wonder whether this was something that Tony Bingham had in mind when he used the now famous traffic light analogy to explain the sequence of notices dealing with payment and suspension required under sections 110-112 of the Construction Act. The green light is the payment notice required under section 110(2). The amber light is the notice the paying party has to give under section 111 if it intends to withhold payment. Last but not least, the red light is the notice that the payee must give under section 112 before he suspends performance.

But it is clear from recent decisions of both adjudicators and judges that the traffic lights have gone on the blink. This is going to result, no doubt, in further pile-ups on projects and in adjudications.

The crux of the problem is that the Construction Act says very little about the precise implications of a failure by the paying party to serve section 110 and/or 111 notice in respect of an application for payment. In particular, there is serious confusion about the circumstances in which a paying party intending to withhold money must serve a section 111 notice.

Rudi Klein argues that, for the legislation to be meaningful, Parliament must have intended that if a paying party fails to serve the prescribed notices, it must pay the amount claimed by the payee in full whatever the particular circumstances of the case. A more conservative position tries to interpret the language used in the legislation rather than trying to read Parliament's collective mind.

So where do the courts stand on these issues which, as we brace ourselves for economic downturn, promise to become increasingly significant? First, it now seems to be accepted by the courts, if not by all adjudicators, that there is no sanction for the failure by a paying party to serve a section 110 notice. The absence of a notice does not mean that the amount applied for becomes due for the purposes of section 111.

Failure by a party to serve a withholding notice does not make the amount claimed due under the contract

The position is less clear about the circumstances in which a party that withholds a claimed payment must serve a section 111 notice, and also on the implications of not serving a notice when it is required. The recent decisions of Lord Macfadyen and Judge Gilliland in SL Timbers System vs Carillion Construction and Millers Specialist Joinery vs Nobles Construction have now established that failure by a party to serve a withholding notice does not make the amount claimed due under the contract. This is a vital point since section 111 requires notice to be given only in respect of the withholding of a "sum due under the contract".

In most cases involving a dispute about withholding notices, the real issue for the adjudicator is ascertaining the amount due under the contract. That task will involve him applying the terms of the contract and the legal principles of abatement and set-off. Whereas a section 111 notice will not be required where money is being withheld on account of abatement, it will be required where the issue is one of set-off.

A number of court decisions provide guidance on the sort of grounds for withholding, all of which are, in the words of Lord MacFadyen, "top-line matters" and also matters of abatement, which do not require service of a section 111 notice. Those matters include, for instance, a challenge by the paying party on the basis that the work claimed has not been carried out as required by the contract or is otherwise defective. Conversely, a typical set-off, which does require a notice, is a cross-claim by the paying party for damages for delay.