Payment and rights to withhold

Contracts entered into before 1 October 2011

In a contract to which the Housing Grants, Construction and Regeneration Act 1998 applies in its original form, the payer may not withhold payment of a sum due unless they have issued a valid withholding notice. If they fail to do so, they must pay the sum due in full. However, it is then necessary to identify the sum due for this purpose. This is not as straight forward as it may sound because the meaning of the words 'sum due' will depend on the provisions of the particular contract being used.

In some contracts, the sum due will be the defined as the amount stated in the relevant certificate or notice of payment, for example, the JCT 2005 Standard form of building contract clause 4.13. Where this is the case, and in absence of a valid withholding notice the payer should pay the amount stated or certified.

However, in other contracts, the sum due is defined as the proper value of the works, rather than the certified value. This approach is taken by the Scheme for Construction Contracts (England and Wales) Regulations 1998. Where the sum due is defined in this way, an employer who has failed to serve a withholding notice will still be able to withhold payment on the grounds of defects or other matters which reduce the value of the works.

A sum due under the contract may, depending on the terms of the contract, cease to be due. This may occur where the contract is terminated following the insolvency of the contractor. For example, see clause 27.6.5.1 of the JCT Standard form of building contract (With contractor's design) 1998 edition as construed by the House of Lords in Melville Dundas Ltd v George Wimpey UK Ltd.

However, as a matter of good practice the contract administrator should always ensure that a valid withholding notice is issued at the requisite time.

Contracts entered into on or after 1 October 2011

In a contract to which the HGCRA applies in its amended form, issues as to the meaning of ‘sum due’ do not arise. This is because the obligation to pay the ‘sum due’ in s111 is replaced with an obligation to pay the ‘notified sum’.

Under the JCT 2016 contracts:

• Interim valuation dates (IVDs) have been introduced, establishing a common valuation date. This is designed to speed up payments throughout the supply chain, in line with the government’s Construction Supply Chain Payment Charter.
• The contracts no longer distinguish between interim payments due before or after practical completion (PC). Accordingly, the period between interim certificates issued post-PC has reduced from 2 months to 1 month.
• Notified sums (plus interest) are now automatically and expressly recoverable as debts.