Can a main contractor deduct contra-charges from another site? Standard JCT subcontracts do not contain an express cross-contract set-off clause, although they do include provisions regarding deductions under the relevant main contract conditions for that project. Common law equitable set-off can sometimes apply across distinct agreements, but this requires a strict legal test: the cross-claim must be so closely connected to the payment claim that it would be manifestly unjust to enforce payment without taking it into account (as confirmed in Geldof Metaalconstructie NV v Simon Carves Ltd). To avoid relying on this legal test, some bespoke amendments insert express terms permitting cross-contract set-off across separate schemes.
When interim valuations or final account applications are submitted, trade subcontractors are occasionally met with unsubstantiated contra-charges and set-off claims.
Where a payer proposes to pay less than the notified sum, Section 111 of the Housing Grants, Construction and Regeneration Act 1996 generally requires an effective Pay Less Notice setting out the sum considered due and the basis of calculation. If a notified sum has crystallised without a compliant notice, a main contractor cannot simply withhold certified payments on one project to offset an unresolved dispute on another without following that mandatory statutory procedure.
Set-Off Principles for UK Specialist Trades
- Standard JCT Position: Unamended JCT subcontract conditions govern deductions arising under that specific subcontract or under the corresponding main contract terms for that development; they do not provide an express right to deduct sums from entirely separate projects.
- Bespoke Cross-Contract Terms: Some bespoke schedules of amendments insert clauses entitling the contractor to deduct alleged liabilities or losses arising on any other past, current, or future project.
- Section 111 Notice Mechanics: Any proposed deduction against a notified sum must be accompanied by a timely Pay Less Notice stating the sum considered due and the specific basis of calculation.
1. Technical Authority: The Legal Limits on Contractual Set-Off
In construction practice, set-off generally arises in three ways: contractual set-off, legal set-off, or equitable set-off. Standard JCT subcontracts (such as DBSub/C and SBCSub/C) regulate deductions arising under the specific subcontract package and address how deductions under the main contract conditions for that project operate. They do not contain express terms permitting cross-contract set-off against separate projects.
At common law, equitable set-off may sometimes be asserted across distinct contracts, but this is subject to a strict, fact-sensitive test. Following the Court of Appeal judgment in Geldof Metaalconstructie NV v Simon Carves Ltd [2010] EWCA Civ 667, the party seeking set-off must establish that the cross-claim is so closely connected with the claim that it would be manifestly unjust to enforce payment without taking into account the cross-claim. Because establishing this connection is fact-dependent, some main contractors seek to insert bespoke amendments creating an express contractual right to set off across unrelated contracts.
“The Contractor may deduct from, or set off against, any monies due or becoming due to the Sub-Contractor under this Sub-Contract, any liability, loss, damage, expense, or claim due or anticipated to become due from the Sub-Contractor to the Contractor under this or any other contract between the parties.”
(Note: This illustrative clause purports to create a broad right of deduction across separate projects, irrespective of whether the equitable set-off test is satisfied.)
Where a payer intends to pay less than the notified sum, Section 111 of the 1996 Act requires the service of an effective Pay Less Notice. The notice must specify the sum considered due and the basis on which that sum is calculated, served no later than the prescribed period before the final date for payment. You can verify notice compliance against my invalid Pay Less Notice checklist.
2. Practical Commercial Application: Cross-Site Contra-Charges
When working across multiple sites for the same contractor, packages are commercially separate unless bespoke terms link them. Where an express cross-contract clause is agreed, an unresolved dispute on Project A may lead the contractor to withhold certified monies on Project B.
On-site contra-charges often involve shared site items such as welfare facilities, waste removal, damage to adjacent finishes, or coordination delays. If these charges are introduced without contemporaneous site records, agreed daywork sheets, or defect notifications required by the subcontract, the subcontractor should challenge the basis of calculation and evidence supporting the deduction.
3. Commercial Risk Considerations
Agreeing to broad set-off clauses creates significant commercial risk:
- Cross-Project Working Capital Disruption: A dispute on one development can restrict cash flow on a separate, profitable project, impairing operational liquidity.
- Cumulative Margin Impact: Disputed contra-charges applied across multiple interim cycles can accumulate into substantial deductions, significantly eroding subcontract profit margins at final account.
- Procedural Notice vs Substantive Dispute: Serving a compliant Pay Less Notice allows a payer to withhold payment on that interim date, but it does not determine the underlying merits of the claim. The validity of the deduction remains open to challenge through negotiation or adjudication.
- Statutory Right of Suspension: Under Section 112 of the Construction Act 1996, where a notified sum is not paid in full by the final date for payment and no effective Pay Less Notice has been given, the payee has the statutory right to suspend performance of its obligations upon giving at least seven days’ written notice. Review the precise procedure in my guide on suspending performance under Section 112.
Practical Tender Review: Example Set-Off Negotiation Proposals
During tender review and pre-contract negotiation, specialist subcontractors should scrutinise any terms permitting cross-contract set-off or deductions without contemporaneous evidence. Standard JCT subcontracts (such as DBSub/C 2016 and 2024) already contain specific mechanisms governing deductions under the Main Contract Conditions for that particular project. The illustrative proposal below is a deliberate, protective commercial qualification designed as a negotiation position to narrow rights of deduction strictly to the subcontract itself:
Illustrative Tender Qualification (Negotiation Proposal)
- Proposed Deletion: Seek to remove any bespoke clause permitting set-off or deductions arising from “any other contract or agreement between the Contractor and Sub-Contractor”.
- Proposed Insertion: “The Contractor’s rights of set-off or deduction shall relate solely to bona fide, documented, and substantiated claims arising under this Sub-Contract, and shall in all cases be subject to the service of an effective Pay Less Notice pursuant to Section 111 of the Housing Grants, Construction and Regeneration Act 1996.”
- Proposed Restriction: Seek to delete terms permitting deductions for “estimated” or “anticipated” future liabilities that have not crystallised.
(Note: This qualification is an illustrative example of a protective negotiation position for pre-contract discussion and does not constitute formal legal drafting. Parties should note that standard JCT forms include provisions governing main contract deductions on the same project.)
Received a Deduction or Pay Less Notice?
Where a payer intends to pay less than the notified sum, Section 111 requires an effective Pay Less Notice stating the sum considered due and the basis of calculation. If a notice fails to satisfy these requirements, the notified sum remains payable under the statutory scheme. Use my structured commercial templates to manage your correspondence.
- Section 111 Commercial Response Letter Template (.docx) — an independent commercial template, not an official statutory form
- Payee Notice in Default under Section 110B Template (.docx)
- 10-Point Pay Less Notice Review Checklist (.pdf)
- Section 112 Notice Template (.docx) — a 7-day written notice of intention to suspend performance under Section 112
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Frequently Asked Questions: JCT Set-Off and Contra-Charges
Can a main contractor set off costs from an entirely separate project?
Under unamended standard JCT subcontracts, there is no express contractual clause permitting deductions from entirely separate contracts. Common law equitable set-off can sometimes apply across separate contracts, but only where the claims are so closely connected that it would be manifestly unjust to enforce payment without taking into account the cross-claim (as established in Geldof Metaalconstructie NV v Simon Carves Ltd). Some bespoke amendments seek to create an express contractual right to cross-contract set-off.
Does a contra-charge deduction require a Pay Less Notice under Section 111?
Yes. Where a payer intends to pay less than the notified sum, Section 111 of the Construction Act 1996 requires an effective Pay Less Notice specifying the sum considered due and the basis on which that sum is calculated, served by the prescribed deadline.
Does issuing a Pay Less Notice prove that a contra-charge is legally valid?
No. Serving a timely Pay Less Notice regulates the amount payable for that interim payment cycle under Section 111, but the substantive commercial validity and evidence supporting the underlying contra-charge remain a separate contractual matter.