Adjudicator’s decision on shaky “ground” on withholding notices?

We are probably all familiar with the wording of Section 111(2) of the Housing Grants Construction and Regeneration Act 1996 (the Act), i.e. that to be effective a withholding notice must specify the amount to be withheld and the ground for withholding.

In the recent case of Windglass Windows Ltd v Capital Skyline Construction Ltd & Another [2009] EWHC 2002(TCC) (an enforcement of an Adjudicator’s Decision), Mr Justice Coulson examined an argument put forward by Capital that the Adjudicator had exceeded his jurisdiction when he concluded that the withholding notices were invalid because they did not set out any valid grounds for withholding. Capital’s argument was that the Act does not require that the ground for withholding payment set out in the notice be valid for that notice to be an effective withholding notice.

Windglass had issued two applications for interim payment, to which Capital had responded with two identical withholding notices. The withholding notices stated: “… Our financial director … is not willing to process this amount due to insufficient supporting information. Please note that our company policy is such that each sub-contractor valuation must be presented in a standard format … and authorised by the appropriate site manager before your application can be processed …”

Windglass argued that there was no contractual agreement stipulating that applications for interim payment were required to be in certain format. The Adjudicator agreed, and decided accordingly that the withholding notices did not meet the requirements of the Act in that “they did not seek to propose the ground(s) for withholding” and therefore “Capital have not issued effective Notices of … Withholding under Section … 111 of the Scheme”.

Mr Justice Coulson held that there were four reasons why Capital’s allegation that the adjudicator exceeded his jurisdiction must fail:

1. In deciding that there were no effective withholding notices such that Capital could reduce, or not pay at all, sums otherwise due to Windglass, the adjudicator had decided the issues put to him, i.e. that decision was within his jurisdiction;
2. The Judge did not accept the suggestion that section 111 of the Act does not require a withholding notice which sets out valid grounds for withholding money otherwise due; nor did he agree that, as long as there is something which purports to be a withholding notice, then that is sufficient to justify withholding, regardless of the contents of the notice itself. From an examination of the express wording of the Act, the Judge concluded that there was no meaningful distinction between a ‘valid’ or an ‘effective’ notice.
3. The adjudicator set out why he considered the withholding notices were not effective, and was right to reach the conclusion that he did.
4. Even if the adjudicator should have looked at and taken into account the alleged counter-claim for defects and delay, it was so vague, so unparticularised, so unlinked to the terms of the contract, that it could not operate as a valid set-off and counter-claim in any event.

Capital also argued that “… the notice should act as a ‘gateway’ by which it gains entitlement to raise any other defence in the adjudication”. Mr Justice Coulson rejected that argument saying “… The 1996 Act does not permit a party to put in an effective withholding notice and then, in the subsequent adjudication, seek to put together an entirely different justification for withholding payment. Such … [an] approach … is contrary to the 1996 Act, which emphasises the obligation on the paying party to give good reasons, there and then in advance of the date for payment, if any part of a sum otherwise due is not going to be paid. If that paying party does not do so, then, in the words of Chadwick LJ, it has to pay now and argue later”.

The adjudicator’s decision was duly enforced.

This article was first published in Construction News Update, Autumn 2009.