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The devil is in the detail in the fiendish world of payments

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legal matters

Abatement, set-off and counter-claim: now there are some words to conjure with. At first glance they may seem to be no more than a clutch of legal concepts that defy easy definition and are just too boring to consider further. Their common theme, however, is non-payment and the importance of distinguishing between them has recently been highlighted by the case of Whiteway Construction v Impressa Castelli (9.8.00).

At bar school we were taught that a counterclaim could be used, much like a sword, to defeat a claim where the defendant had a cross-claim against the claimant, no matter where it came from. Thus a contractor's claim for payment under a building contract could be met by a counter-claim for remedial works arising out of some long-forgotten contract on another site. A set-off, we were told, could only be used as a shield against the claim if the cross-claim arose out of the same contract.

Abatement we seldom bothered with, unless we took the specialist Sale of Goods option, but we had a vague idea that it was something to do with the price of the goods not being payable because the sum claimed had not been earned. And so for years as a practitioner, I dutifully pleaded counter-claims and set-offs against contractors' claims for payment and professionals' fee claims and forgot all about abatement.

Then came the Housing Grants Construction and Regeneration Act. It had, as its twin objectives, introducing adjudication as a swift procedure for resolution of disputes and preventing unwarranted deductions from sums otherwise due under building contracts.

So great was the interest in adjudication when it first hit the scene that little attention was paid to the payment provisions of the Act and the attendant scheme. The lack of prominence of the payment provisions was not assisted by the fact that they were fiendishly complicated - even now a diagram illustrating the numerous operative dates greatly assists one's understanding.

Gradually, however, as more and more adjudicator's decisions were challenged in the courts, the importance of the payment provisions became increasingly clear. Particularly the need to serve a withholding notice at least seven days before the final date for payment if any deductions were to be made from the sums due. The courts held, in decisions such as VHE Construction v RBSTB Trust and Northern Developments v J&J Nichol , that an adjudicator's decision could not be challenged on the basis that the paymaster had a valid set-off or counter-claim, unless a withholding notice had been served. Usually, of course, it had not and so that was the end of that.

Or was it? The payment provisions of the Housing Grants Act also refer to the much overlooked concept of abatement, which set the lawyers to thinking. Ultimately the argument came out something like this. If you, the paymaster, have a counter-claim and you want to set it off against sums that would otherwise be due to the contractor, you have to serve a withholding notice under section three of the Act before making any deduction. But if the work has not been carried out properly in the first place, or the sums claimed by the contractors are greater than the value of the work carried out, you, the paymaster, are not making any deductions from sums due since the sums claimed have not yet been earned.

The reduction is an abatement of the price claimed and need not be the subject of a withholding notice. So, the argument went, counter-claims and set-offs are subject to the rigours of the Act and the scheme - abatement is not. Further support for the argument was gained from the wording of some contracts, such as DOM/l, which entitle the contractor to the value of work properly executed - if it has not been properly executed the contractor has not earned the sums claimed.

In the Whiteway case, the court made short work of this argument. Judge Bowsher QC, of the Technology and Construction Court, decided that parliament could not have intended that this particular ground for non-payment should have slipped through the legislative net - whatever the reason for non-payment, it has to be spelt out in a withholding notice if a deduction is to be made. But one can not help but think that this is not the last word on abatement.

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