Liquidated damages and withholding notices (Reinwood v Brown)

26 March, 2008
by: Cripps

s.111 of the Housing Grants Construction and Regeneration Act 1996 (“HGCRA”) provides that a party to a construction contract may not withhold payment after the ‘final date for payment’ of a sum due under the contract unless he has given an effective notice of intention to withhold payment. But what happens when an Employer wants to withhold liquidated damages and the Architect subsequently awards an extension of time? Here is one such situation that has recently been considered by the House of Lords…

In the case of Reinwood Ltd v L Brown & Sons Ltd (2008) the Contractor was employed under a JCT 1998 Private with Quantities contract.

The Contractor failed to complete by the Completion Date and applied for an extension of time. The Architect issued a Certificate of Non-Completion on 14 December 2005 and subsequently a certificate for interim payment on 11 January 2006. The final date for payment of this sum was 25 January 2006 and the deadline for any withholding notice was 20 January 2006.

On 17 January 2006, the Employer, Reinwood, served a notice of its intention to withhold payment of part of the certified sum on the basis that it was entitled to deduct liquidated and ascertained damages in respect of the Contractor’s failure to complete on time. The Employer paid the balance on 20 January 2006 (5 days before the final date for payment).

On 23 January 2006 the Architect granted an extension of time, cancelling the Certificate of Non-Completion upon which the Employer relied in the withholding notice. The Employer had failed to pay sums withheld in reliance on the now cancelled Certificate of Non-Completion by the final date for payment. The issue was whether the Employer should have done so.

The House of Lords has confirmed that the answer is ‘No’. The withholding notice remained valid despite the subsequent extension of time. The withholding notice was effective at the time it was given (note it was given early) and at the date of payment (also made early).

The extension of time cancelled the Certificate of Non-Completion but was not retrospective. Up until 23 January the Employer was entitled to rely on the Certificate of Non-Completion, its withholding notice was effective and payment made in reliance on that certificate.

To say otherwise would potentially place employers under pressure to produce large sums of money in very short time frames through no fault of their own, which is the sort of scenario the HGCRA sets out to avoid. The purpose of a withholding notice is to let the parties know where they stand.

This did not mean that the Employer could withhold the damages for non-completion indefinitely. As neither the HGCRA nor the JCT contract specified a period for payment of a sum withheld in this situation, the House of Lords looked to the default provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998, Part II, paras 7 and 8. After grant of the extension of time the payment would have become due after 7 days from an application by the Contractor and the final date for payment would be 17 days later.

Of course, if the extension of time had been granted before the interim certificate for the stage payment had been issued, the Employer would not have been entitled to deduct the damages. This is because the earlier Certificate of Non-Completion would have been cancelled before the stage payment became due.

The House of Lords has deliberately left open the outstanding question of whether the Employer would still have succeeded if the extension had been granted after the service of the withholding notice, but before the Employer actually paid out on the interim certificate.

Thus a canny Employer, knowing an extension of time application is likely to be granted imminently, can give an early withholding notice and make an early payment of any sum due, after deducting the liquidated damages.

Contractors should consider adding failure to repay liquidated damages within a specified time to the list of specified defaults entitling them to suspend works. Alternatively contractors may wish to use a contractual provision stating that cancellation of a notice of non-completion has the effect of cancelling any notices which the employer may have served in reliance upon that notice of non-completion. An amendment should also be made setting out the due date and final date for payment for the repayment of liquidated damages, to avoid the Scheme applying by default.

JCT Newsflash

The JCT (Joint Contracts Tribunal) has issued an update introducing new forms for execution as a Deed and guidance notes to replace the existing form within JCT contracts. The new forms facilitate an additional method for execution.

The attestation update, which comes as a result of the Companies Act 2006 (section 44(2)(b)), provides for a third method of execution as a Deed, allowing a signature by a single director, suitably witnessed, to suffice. See the JCT website for more information.

The new provision of the Companies Act 2006 takes effect from 1 April 2008. See our bulletin for more information about the Companies Act 2006.

Reviewed in 2015