Adjudication and Witholding Notices

For construction contracts entered into before 1 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.

In order to be valid the withholding notice must specify the amount which is to be withheld and the reasons for withholding the payment.

If the paying party does not issue a valid withholding notice then the receiving party can suspend performance and may refer the dispute to an adjudicator

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.  The pay less notice should specify the sum believed to be due and explain the basis upon which the sum has been calculated.

It is extremely difficult to challenge an adjudicator's decision.  An adjudicator's decision can only be challenged on the basis that the adjudicator has acted outside his jurisdiction or has breached the rules of natural justice.  An adjudicator's decision can be enforced if he makes an error in fact or law or in the procedure he follows provided it can be shown that the adjudicator acted within his jurisdiction and in accordance with the rules of natural justice.

In the case of Urang Commercial v Century Investments and Eclipse Hotels (Luton) decided in 2011, Urang issued proceedings to enforce two adjudication decisions which have been made against Century and Eclipse. In both of the adjudications Century and Eclipse had raised counterclaims in response to Urang’s claims for payment.

The adjudicator had decided that the counterclaims raised by Century and Eclipse raised issues which should have been the subject of a withholding notice. The Adjudicator decided that the sums claimed were in the nature of counterclaims and could not be deployed as a defence to payment in the absence of a valid withholding notice.  As a withholding notice had not been issued the adjudicator decided that he could not assess the claims.

Century and Eclipse challenged the adjudicator’s award claiming that that;

1. In failing to take account of the counterclaims, the adjudicator had breached the rules of natural justice
2. In deciding not to consider the counterclaims in the absence of a withholding notice, the adjudicator had acted unfairly.
3. Century and Eclipse had in fact served a valid withholding notice and therefore the adjudicator had acted contrary to the principles of natural justice.

The Technology and Construction Court enforced the adjudicator's decision in both cases.

The court held that it is no defence to argue that the adjudicator has made an error of law, fact or procedure. The court found that provided that it can be shown that the adjudicator answered the question that was referred to him, the court cannot interfere even if the adjudicator has answered the question incorrectly.

The court went on to consider the issue of whether a withholding notice is required to be issued on raising a counterclaim in adjudication.  In this case a withholding notice was only required to be issued in relation to sums due on interim valuations. There was no requirement to issue a withholding notice for other sums claimed or in relation to a claim for damages. The court, therefore, found that the adjudicator was wrong to decide that he could not consider the counterclaims raised due to the absence of a withholding notice.  However, the court concluded that the adjudicator's decisions were enforceable because he had answered the correct question which was whether Century and Eclipse could use their counterclaim as a defence in the adjudication. The fact that the adjudicator answered the question wrongly did not provide Century and Eclipse with a defence.

For more information on construction disputes contact Amanda Mehlin on 01689 887808 or email at amanda.mehlin@cwj.co.uk