Withholding Payment for Construction Defects

Withholding Payment for Construction Defects


When the final account and final payment must be considered when a construction project reaches completion, it is common for the paying party to withhold payment against what they consider to be defective works.

Most standard forms of construction contract contain mechanisms/provisions for dealing with defects in construction, normally in the form of a procedure which includes a notice that practical completion has been reached, a defects liability period and a notice of making good or defects.

NOTE: It is important that the contractual procedure is understood so that any rights to claim are not lost.

The types of issue that arise under the heading of construction defects relate to withholding payment on the grounds of defective work, pursuit of due retention or pursuit of damages for defective, including latent defects. It is also not unusual for one party to consider an item a defect and the other a variation, the latter of which does not have to be carried out after practical completion. This can often lead to dispute if other contractors are employed to carry out the work. Sewn into the financial remedies pursued will also be arguments in respect of what constitutes practical completion, valid service of notices and failures to carry out timely defects inspections.

NOTE: If not defined in the contract, there is no hard and fast rule as to what constitutes practical completion unless expressly agreed. This can lead to issues regarding Liquidated and Ascertained Damages (LAD's) and defects. Often paying parties will accuse the Contractor or Subcontractor of non-completion for minor outstanding works whilst taking possession of the building which, in the absence of a definition, is likely to constitute practical completion.

Arbicon have dealt with numerous construction projects where works have been significantly non-compliant. We adopted our management expertise and adjudicated our Clients' rights, saving them from lengthy court proceedings and expense.

Non-compliant Example
Arbicon acted on a project where an office building was converted into numerous flats. The Contractor failed to obtain building control sign off due to a defective sound test, which is critical on flats and dwellings that adjoin one another.

The Client had not only endured incompetence with the builder, but the Contract Administrator was also negligent on numerous points, including certifying non-compliant work. Arbicon prosecuted the Contractor in adjudication and prepared the PI claim against the Contract Administrator which, in the end, became unnecessary as the Contractor was held liable for the defective works and the matter was settled. If the Contractor had gone bust the Contract Administrator would have had to pay for the negligence!

Pursuit of the final account and final payment, including retention, can be difficult when set off and defects are argued.

Other Common Situations
It is often the case that an Employer or Contractor as the paying party, will create contra charge claims that are very significant, these are often over-inflated by hundreds of thousands and are designed to make the payee give up so they can keep the money. We had a case recently where a contra charge claim in a pay less notice for £800,000 was levelled at the Subcontractor who was asking for £80,000. All of the contra charge claim was dismissed and the payment asked for was due. Do not despair in such situations! Such contra claims are nearly always worth nothing, we will use our expertise to evaluate such claims and give you an expert risk assessment and assist in nullifying such adverse tactics.

Arbicon are experts in resolving problem final accounts and collecting outstanding retentions. Our team understand the law and rights of parties in respect of these matters and the best commercial way of tackling such issues. For advice, please use our contact form or call our offices below:

01733 233737 Peterborough

0207 406 1494 London

0121 262 4086 Birmingham