Summary and implications

In deciding disputes in relation to payment under construction contracts, adjudicators have often taken the view that, in order to withhold any sums under the contract, a valid withholding notice must be issued. In two such recent adjudication decisions, the adjudicator ruled that because a withholding notice had not been issued, a counterclaim could not be considered in the adjudication.

In adjudication enforcement proceedings however, the Technology and Construction Court (TCC) recently confirmed in Urang Commercial v Century Investments and Eclipse Hotels (Luton) that the requirement for a withholding notice to be issued is “confined to the procedure in relation to interim valuations”. There is no requirement to issue a withholding notice for other sums claimed by a contractor or when bringing a claim for damages unless specified in the contract.

The court also held that, as the adjudicator had answered the correct question, albeit wrongly, that there was no breach of the rules of fairness and natural justice.

Related item:

Urang Commercial v Century Investments and Eclipse Hotels (Luton)

To read the case in full, click here

Withholding payment in construction contracts

In order to withhold a payment under a construction contract entered into before 1 October 2011, section 111 of the Construction Act 1996 requires the paying party to issue a valid withholding notice.

A valid withholding notice must specify the amount proposed to be withheld and the reasons for withholding the payment. The withholding notice must also be given no later than a specific date before the final date for payment. If the paying party fails to issue a valid withholding notice then the unpaid party has the right to suspend performance of its obligations under the contract and can give notice of its intention to refer the dispute to an adjudicator.

The Local Democracy, Economic Development and Construction Act 1999 has amended the Construction Act 1996 and has replaced the existing s111 of the Construction Act 1996. This means that for all construction contracts entered into after 1 October 2011 the requirement to issue a withholding notice has been replaced with a requirement for the paying party to issue a pay less notice specifying the sum they consider is due and the basis on which this sum was calculated.

Challenging an adjudicator’s decision

An adjudicator’s decision can only be challenged on very limited grounds if it can be shown that:

  • the adjudicator acted outside his jurisdiction for example by deciding a dispute that was not referred to him; or
  • the adjudicator acted in breach of the rules of natural justice for example by discussing issues separately with the parties.

It is therefore hard to successfully challenge an adjudicator’s decision. This reflects the fact that an adjudicator’s decision is intended to be binding on the parties subject to final determination by litigation or arbitration. This means that the adjudicator’s decision will be enforced even if he makes an error in fact or law or in the procedure he adopts, provided it can be shown that the adjudicator acted within his jurisdiction and acted in accordance with the rules of natural justice.

Urang Commercial v Century Investments and Eclipse Hotels (Luton)

This case involved two separate actions brought by the building contractor Urang to enforce two adjudication decisions against Century and Eclipse. In both adjudications Urang made a claim for payment of sums which had been certified under an interim valuation but which had not been paid. Both Century and Eclipse raised counterclaims in response to Urang’s claims for payment.

The adjudicator decided that the issues raised by Century and Eclipse in their counterclaims “are properly the subject of a withholding notice” and that in the absence of such a notice having been issued, he could not assess the claims. The adjudicator awarded a sum of money to Urang in both adjudication decisions, and subsequently both Century and Eclipse failed to make the required payment.

In the enforcement proceedings, Century and Eclipse challenged the adjudicator’s award on the grounds that:

  1. the adjudicator had acted in breach of the rules of natural justice in failing to take account of their counterclaim;
  2. the adjudicator’s decision that, due to the absence of a withholding notice, he could not consider their counterclaim was erroneous and unfair;
  3. the adjudicator had failed to take account of the fact that they had in fact served a valid withholding notice and therefore had acted contrary to the principles of natural justice.

Is a withholding notice required in order to raise a counterclaim in adjudication?

The TCC enforced the adjudicator’s decision in both cases and held that the adjudicator did not breach the rules of natural justice in failing to consider the counterclaim.

The TCC held that in enforcement proceedings, it is no defence to argue that the adjudicator has made an error of law, fact or procedure. Provided 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. This will not breach the rules of natural justice.

The court did consider the issue of whether a withholding notice is required to be issued on raising a counterclaim in adjudication. It was stated that under the contracts in question, a withholding notice was only required to be issued in relation to sums due in interim valuations and that this is consistent with the requirements of the Construction Act 1996. There is no requirement to issue a withholding notice for other sums claimed or when bringing a claim for damages. As a result, the adjudicator was wrong to decide that he could not consider the counterclaims raised due to the absence of a withholding notice.

The TCC concluded that the adjudicator’s decisions were enforceable because he had answered the correct question, namely whether and to what extent Century and Enterprise could use their counterclaim as a defence in the adjudication, “the fact that he answered it wrongly” however “affords Century [and Enterprise] no defence”.

What is the impact of the decision?

The TCC’s decision in Urang is a reminder that the courts will enforce an adjudicator’s decision even if the adjudicator incorrectly decides the issue referred to them, provided the adjudicator has answered the right question. This preserves the sanctity of adjudicator’s decisions subject to final determination by the courts or arbitration.

The Urang case also provides a useful reminder to all parties operating under construction contracts that withholding notices are only required when dealing with sums due in interim payments, subject to the provisions of the contract. It is likely that this reasoning will be applied when deciding when the new pay less notices are required to be issued under the amended Construction Act 1996 although, this is of course subject to the issue being decided by the TCC.