Gauging the impact of Section 111

What notice should be given before withholding money in abatement?

Daniel Atkinson reviews some cases.

ONE SIGNIFICANT change brought about by the Construction Act is in the way payments are dealt with - the emphasis now is on transparency and disclosure.

These days, if a paying party intends to withhold payment for any reason, it must give written notice of this intention after the application for payment has been made and before the last date by which payment is due.

To be effective, the notice (required under Section 111 of the Act) must state the amounts and the grounds for withholding.

The usual reasons for not paying in full include breaches of contract including, for instance, failure to complete the works by the required date. This is known as set-off. The payer may also wish to reduce the payment to take into account the reduced value of the work due to defects. This is known as abatement of the price.

The courts have already confirmed that a Section 111 notice is required in order to withhold payment for set-off under contracts covered by the Act. But the courts have been less clear on whether a Section 111 notice is required for an abatement of price, and decisions so far have been conflicting. However, a recent case provides a common sense approach.

In SL Timber Systems v Carillion Construction (June 27, 2001), Carillion was claiming an abatement of the price based on its re-evaluation of work due to defects.

Lord MacFadyen began by examining the two notices required by the Act. The first is a Section 110 notice which requires the paying party to state the amount it considers is the "sum due" and explain its calculation. The second is the Section 111 notice which states the amount it intends to withhold from the "sum due".

Judge MacFadyen held that any dispute about whether work had been done, or about whether it was properly valued, or about whether some pre-condition to payment had been met, was about how much payment was due, if any. It requires a Section 110 notice but, because such a dispute does not involve an attempt to "withhold. . . a sum due under the contract", it does not require notice to be given of intention to withhold payment under Section 111.

Hence no Section 111 notice is required for abatement of the price.

However, where there is no such dispute but the party from which payment is claimed wishes to advance separate grounds for withholding payment, such as a right of retention in respect of a counterclaim, that would constitute an attempt to "withhold. . . a sum due under the contract", and would require a Section 111 notice. Hence a Section 111 notice is required to withhold payment for set-off.

Lord MacFadyen reviewed relevant cases. The clearest support for his approach was in Woods Hardwick v Chiltern Air Conditioning (in the Technology and Construction Court in 2000). In that case, Judge Thornton stated that an abatement would not be caught by Section 111 of the Act so an abatement defence could defeat or reduce the amount claimed.

The clearest decision to the contrary was Judge Bowsher's, in Northern Developments (Cumbria) v J & J Nichol, that an adjudicator has no jurisdiction to consider any matter not raised in a Section 111 notice. Lord MacFadyen said this took too broad a view of the effect of Section 111.

Even without a Section 111 notice the party making the claim must still show it is entitled to receive the payment it claims. If it can do that it is protected, by the absence of a Section 111 notice, from any attempt by the other party to withhold money due.

What if work is defective but this is not noticed before payment is made? I suggest that we must distinguish between patent and latent defects. If a defect is noticed, or should have been noticed, at the time the value of the work is assessed - a patent defect - then the amount due can be reduced by the reduction in value of the work, namely abatement of price. Unless the contract states otherwise, there is no right to full payment for defective work. Hence this is an issue of valuation of the sum due and it is not necessary to issue a Section 111 in order to withhold payment.

If the defect is a latent one and becomes apparent after interim payment has been made, the matter is less clear. It is usual for each interim valuation to be provisional and subject to adjustment in subsequent valuations.

The decision in Whiteways Contractors v Impresa Castelli Construction (August 2000) suggests a Section 111 notice is required for latent defects that become known when further payment becomes due. This could create problems if the last payment has already been made before the defect was discovered, and it is an area of law that remains to be developed.

Key points

A Section 111 notice is required to be given if payment of the sum due is to be withheld. The notice must state in writing the amounts to be withheld and the grounds for each amount.

A Section 111 notice for abatement is probably not necessary for defects that are obvious at the time of assessment of the work in question, but should be given in view of the conflicting court decisions so far.

A Section 111 notice may be required for abatement of price in an interim payment for work previously paid for and subsequently found to be defective.

If the last payment has been made before the defect becomes apparent, an adjudicator's order can be sought or litigation or arbitration commenced.