Deduction Of LADS Under Withholding Notices – The Effect On Payment Obligations Where A Subsequent Extension Of Time Is Granted [ 24 Apr 2008]

(Construction and Engineering )

The Facts

Reinwood Ltd v L Brown & Sons Ltd [2008] 116 ConLR 1 concerns a JCT 1998 Standard Form of Building Contract With Quantities made between Reinwood (the "Employer") and L Brown and Sons Ltd (the "Contractor") under which the Contractor was employed to build 59 apartments in Manchester. The completion date under the building contract was 18 October 2004 and liquidated damages were payable for delays beyond that date at a rate of £13,000 per week or part thereof.

On 7 December 2005, the Contractor applied to the Architect for an extension of time pursuant to clause 25 of the building contract. Under clause 25, if the Architect intends to fix a new completion date and grant an extension of time he must do so within 12 weeks of receipt of the contractor's application notice, unless the new completion date is fixed as a date occurring before 12 weeks expires, in which case the new completion date must be notified to the contractor prior to the occurrence of such date.

Notwithstanding the application made for an extension of time, on 14 December 2005 the architect issued a certificate of non-completion to the Contractor pursuant to clause 24.1, which says,

"If the Contractor fails to complete the Works by the Completion Date then the Architect shall issue a certificate to that effect. In the event of a new Completion Date being fixed after the issue of such a certificate such fixing shall cancel that certificate and the Architect shall issue such further certificate under clause 24.1 as may be necessary."

Once a certificate of non-completion is issued, the employer has the right, under clause 24.2, to recover liquidated damages for delay by deducting them from monies due provided that he has notified the contractor in writing before the final date for payment of an amount due that he may intend to deduct liquidated damages and provided that he has complied with the payment obligations in the building contract concerning the issue of an effective notice of his intention to withhold payment, which must be submitted not later than 5 days before the final date for payment.

The Architect issued an interim payment certificate on 11 January 2006. The sum stated was £187,988.  The final date for payment of this sum was 25 January 2006. On 17 January 2006, the Employer issued a notice under clause 24.2 informing the Contractor it intended to deduct liquidated damages. A second notice was issued on the same day pursuant to clause 30 which stated the Employer was only prepared to pay £126,359 of the sum due. £61,629 was being deducted as liquidated damages. The revised sum was paid on 20 January 2006.

The Architect subsequently granted an extension of time on 23 January 2006, fixing a new completion date of 10 January 2006.  The revised, later completion date had the effect of reducing the amount of liquidated damages now payable by the Contractor. Only £12,326 was now due. As a result of this, the Contractor wrote to the Employer on 24 January 2006 and claimed that payment under the now paid interim certificate should have been for the amount of £175,662 and not £126,359. The Employer did not increase the interim payment before the final date for payment, 25 January, and the Contractor, on 26 January 2006, served a notice of default on the Employer under clause 28.2.1.1, which deals with failure to pay amounts properly due on or before the final date for payment.

The Employer repaid the sum of £49,303 to the Contractor on 1 February. This put the Contractor in the correct position, following the extension of time granted, concerning the amount of liquidated damages properly owing and ended the Employer's specified default as set out in the Contractor's notice of default.

Clause 28.2.4 of the Building Contract states that where the Employer repeats a specified default which will affect the progress of the works, then, upon or within a reasonable time after such repetition, the Contractor may by notice to the Employer determine the employment of the Contractor under the Building Contract. Determination takes effect on the date of receipt of such notice. When, on 28 June 2006, the Employer failed to pay the Contractor £39,981 which was owed, the Contractor, on 4 July 2006, served a notice of determination on the Employer citing the notice of 26 January as the previous default. On 6 July, the Employer accepted the notice as a repudiatory breach of contract and issued proceedings against the Contractor for unlawful termination of the Building Contract..

Decision

On a successful appeal by the Employer, the House of Lords reviewed the timeline of events. Crucially, it was noted that the Architect had granted an extension of time after the issue of the interim certificate and after payment had been made on that certificate by the Employer but before the final date for payment.

If the extension of time had been granted prior to 11 January, the date when the architect issued his interim certificate, the factors surrounding the extension of time and their effect on payment would have been taken into account in the interim certificate issued as the non-completion certificate would have already been invalidated. If the extension of time had been granted after the final date for payment, reliance would have been placed on the withholding notice issued in connection with the interim certificate and deduction of any liquidated damages would have been irrefutable, given that the certificate of non-completion would not have been cancelled prior to the final date for payment.

Their Lords held that the extension of time invalidated the earlier certificate of non-completion and imposed an obligation on the Employer to repay any excess liquidated damages deducted prior to the extension of time being granted. It did not, however, invalidate the certificate retrospectively. So in granting the extension of time on 23 January, the certificate of non-completion issued on 14 December 2005 was invalidated from 23 January 2006. Thus the invalidation of the certificate of non-completion did not affect the issue or validity of the interim certificate, the withholding notice or the payment made by the Employer on 20 January 2006.

Whilst the invalidation of the certificate of non-completion obliged the Employer to repay any excess liquidated damages taken but no longer due, there was no time limit for doing so stipulated in the Building Contract. The House of Lords held that the Employer had repaid the liquidated damages to the Contractor promptly and was not in default, even though repayment had been made after the final date for payment had elapsed. This is because the Contractor's letter of 24 January acted as an application for further payment which created a new due date and final date for payment under the Building Contract. The Employer had paid the Contractor monies owing prior to the new final date for payment of 17 February 2006.

Comment

It is clear on the facts of this case that the certificate of non-completion issued was cancelled upon the grant of an extension time, but not cancelled retrospectively. Thus, where an extension of time is granted after the Contractor has been notified of the Employer's intention to deduct liquidated damages, after the withholding notice has been issued and after payment of the interim certificate has been made, but before the final date for payment, the Employer will not be in default of its payment obligations if it fails to refund any liquidated damages due to the Contractor prior to the occurrence of the final date for payment. It is good enough that the Employer repays any sums due within a reasonable time, which the Employer did here. In assessing what is a "reasonable time", the House of Lords said such period would be short, having regard to the default position under the Scheme for Construction Contracts (England and Wales) Regulations 1998.

Since the Employer was held not to be in default by its actions between December 2005 and February 2006, it had not repeated a specified default of failure to pay when it failed to make payment in June. Therefore, the Contractor had unlawfully terminated the Building Contract.

What if the extension of time had been granted after the withholding notice had been issued but before any payment in respect of the interim certificate had been made? Lord Neuberger looked at this question but was not prepared to express a view on it as he felt the answer was not tolerably clear. He found valid arguments existed on both sides under this set of circumstances. He did say, though, that there is a difference between relying on a withholding notice that is correct at the time a payment is made and relying on one which was correct but subsequently becomes incorrect before the final date for payment and payment occur.