Remedies - Scottish Construction Contracts - page 268

For retention to operate, both claims must arise from the one contract. Retention,
when considered in the context of withholding payment, should not be confused with
compensation. Retention is, in effect, a form of security, whereas compensation extin-
guishes a debt, in whole or in part.
Retention has long since been a favoured remedy in building contract disputes, see,
for example, Johnston v. Robertson (1861). In that case, the employers were entitled
to plead in defence a claim for liquidated damages for non-completion against the
contractors' claim for the balance of the contract price and payment for extra works.
In Scotland, there was at one time authority which suggested that the general
rule in respect of retention may not apply to the case of a building contract which
contained provision for payment by instalments, it being doubted whether the
employer had any right to withhold payment of an instalment by virtue of a claim
against the contractor, see Field & Allan v. Gordon (1872). (1872).That position has, however,
been accepted to be incorrect. Unless it is shown in clear and unequivocal words that
thepartieshadagreedinthecontractthatthecommonlawrightofretentionwas
to be excluded, that right would be available in respect of breaches of contract, see
Redpath Dorman Long Ltd v. Cummins Engine Co. Ltd (1981). Retention is considered
further in Section 10.9.1.
10.8.3 Compensation
The essence of compensation is that sums are due at the same time by parties to each
other. Where each party owes the other a sum of money, compensation can operate
to extinguish, or partly extinguish, the debts. Certain prerequisites must be satisfied.
First, the debts must be due at the same time. A debt that is due at a future date cannot
be set off against one that is presently due, see Paul & &Thain v. Royal Bank (1869). Sec-
ond, each debt must be what is termed 'liquid'. A liquid debt is one that is for a readily
ascertainable amount and is not disputed. A claim for damages is not a liquid debt,
see National Exchange Company of Glasgow .v. Drew and Another (1855). In certain,
narrow circumstances, however, there may be exceptions to this general rule, allow-
ing a liquid debt to be postponed because the debtor has an illiquid claim against the
creditor, provided the two contract debts are closely linked, see Inveresk v. Tullis Rus-
sell Papermakers Limited (2010). There must also be what is termed concursus debiti
et crediti , which is that each party must owe money and be owed money in the same
capacity. An example of this is the case of Stuart v. Stuart (1869) in which it was held
that the defender, as an individual, could not plead in compensation certain alleged
counterclaims competent to him as his father's executor.
In Scotland, there has been legislation governing compensation for over 400 years,
see the Compensation Act 1592.
10.8.4 Paying Less under the 1996 Act
In construction contracts governed by the 1996 Act (see Section 1.2.2) a party to a
construction contract may seek to pay less than the sum notiied to them by the payee,
provided they have given an effective notice in terms of s.111(3).