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Lord Justice Jacob noted that the recent Court of Appeal decision in Rupert Morgan ÐÇ¿Õ´«Ã½ Services (LLC) Ltd versus Jervis (12 November 2003) involved "a point of some importance in the world of building contracts".

The point at issue concerned the meaning of section 111(1) of the Housing Grants, Construction and Regeneration Act 1996.

Section 111 deals with withholding notices and states as follows:

'(1) A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given an effective notice of intention to withhold payment…'

'(2) To be effective such a notice must specify – (a) the amount proposed to be withheld and the ground for withholding payment, or (b) if there is more than one ground, each ground and the amount attributable to it, and must be given not later than the prescribed period before the final date for payment.'

Entitled to withold?
In the Morgan case, the architect, in accordance with the building contract, had issued an interim certificate in the sum of approximately £44 000 plus vat following a bill presented by the builder. The clients (the defendants in the litigation) disputed some £27 000 of that amount. However, the clients had not issued a withholding notice within the relevant time period after the certificate had been issued and the builders claimed summary judgment of the disputed balance.

The clients argued that, even though they had not issued a withholding notice, they were still entitled to withhold payment because the unpaid balance either consisted of items of work which were not done, duplications of items already paid for, or represented snagging for works already done and paid for.

The argument put forward by the builders was for a 'wide' construction of section 111(1), that is, once a certificate has been issued and there has been no withholding notice, the certified sum must be paid. Alternatively, the construction put forward by the clients was a 'narrow' one so that if work had not been done it could not be a sum due under the contract which would mean that section 111(1) would not apply.

His Lordship reminded the parties that the fundamental thing to realise about section 111(1) is that it is concerned with ensuring cash-flow. The Latham report of 1994 identified the problem of main contractors abusing their position by withholding payment from sub-contractors in circumstances where they were not entitled to do so.

The provision enacted to overcome the problem – section 111(1) – went even further, dealing with not only payment by main contractors to subcontractors but also payments by clients to main contractors since both main contractors and subcontractors have cash flow needs.

Contract administrators should pay heed to their obligations to certify properly and inform their clients as to the need to issue timely withholding notices.

His Lordship also made it clear that section 111(1) was not dealing with the final position between the parties as to whether the sum certified was properly payable. If the client failed to issue a withholding notice then the client had to pay the sum certified but that did not mean that he could not go on to show that he had actually overpaid the builder. Therefore the lack of a withholding notice is not the end of the story.

A fair solution
A client who has actively overpaid on an interim certificate can get the matter put right in later certificates or, alternatively, he can commence adjudication, arbitration or litigation to get the money back. Section 111(1) "provides a fair solution, preserving the builder's cash flow but not preventing the client who has not issued a withholding notice from raising the disputed items in adjudication or even legal proceedings".

Although the main disadvantage of the statutory provisions for a client is that he is at some risk from insolvency of the builder if he overpays, that risk can be avoided by giving a notice within the time limits of section 111(1). He stated that a good architect should inform a client about the possibility of serving a withholding notice and, while he made it clear that he was not expressing an opinion on the matter, speculated that an architect may even have a duty to do so.

Again, without expressing an opinion, he stated that the client may have a remedy against the architect if the architect negligently issues a certificate for too much.

Timely intervention
The Morgan case provides clear authority for a sensible construction of the all-important section 111(1): if a client or main contractor fails to issue a withholding notice within the stated period before the final date for payment he must pay the sum certified as due to the main contractor/subcontractor to ensure the latter's cash flow but he doesn't lose all rights to any disputed sum.