Will The Grant Of An Extension Of Time Always Prevent An Employer From Deducting Liquidated Or Delay Damages?

In our article headed "What constitutes unreasonable and vexatious behaviour when a notice of determination is served?", we discussed the case of Reinwood Limited v Brown & Sons Limited, where HHJ Gilliland QC having summarised the existing authorities, set out six propositions to assist in deciding whether a notice has been given "unreasonably or vexatiously." For details of these, please click here.

The case has now come before the Court of Appeal, where the decision at first instance has been overturned, although no comment was made on the propositions referred to above. Indeed as can sometimes be the way with appeals, the court looked at the case in a different way and ultimately decided that if the conditions for the deduction of liquidated and ascertained damages ("LAD’s") from a payment certificate were satisfied at the time when the employer gave notice of its intention to deduct, then even if the relevant certificate of non-completion was cancelled by a subsequent grant of an extension of time, the employer was still entitled to deduct the amount of damages specified in that notice.

This perhaps surprising result was tempered slightly by the fact that the Court of Appeal noted that in these circumstances there would still be an obligation on the employer to repay any LAD’s which were deducted within a reasonable time – and the Court of Appeal noted that that timescale could well be as short as a few days. The particular relevance to the case in issue was that if Reinwood was entitled to deduct the LAD’s in the way it did, then it would be able to claim that Brown’s termination of its contract was unlawful.

Briefly the facts were these;

1. The contract was a JCT Standard Form of Contract, 1998 Edition, with Quantities, for the construction of 59 apartments in Manchester.
2. On 7 December 2005, Brown applied for an extension of time;
3. On 14 December 2005, the architect, issued a certificate of non-completion under clause 24.1;
4. On 11 January 2006, the architect issued interim certificate no 29 showing the net amount for payment as £187,988. The final date for payment was 25 January;
5. On 17 January, the Reinwood issued two notices. One was a notice under clause 24.2 of "intention to deduct LAD’s for the period from 14 December 2005 up to the date of Practical Completion of the Works". The second confirmed an intention to withhold £61,629 LAD’s from monies due under interim certificate no 29. Accordingly Reinwood proposed to pay £126,359.
6. On 20 January, Reinwood paid £126,359;
7. On 23 January, the Architect granted an extension of time until 10 January 2006;
8. On 24 January, Brown wrote to Reinwood stating that the effect of the extension of time was that Reinwood was now entitled to withhold no more than £12,326 in respect of LAD’s. The amount due under interim certificate no 29 was, therefore, £175,662;
9. On 26 January, Reinwood not having paid, Brown served a notice of default purportedly under clause 28.2.1.1;
10. On 27 January, Reinwood said that payment of the further sum of £49,303 would be made by 2 February, which it was;
11. On 28 June, Reinwood should have paid £39,981 pursuant to certificate no 34. That sum was not paid;
12. On 4 July, Brown served notice of determination relying amongst other things on the notice of 26 January as the notice specifying the previous default. It ceased work and left the site;
13. On 6 July 2006, Reinwood wrote to Brown purporting to accept its repudiatory breach of contract in leaving the site and refusing to return;
14. Reinwood then on 11 July 2006 issued proceedings claiming that Brown had unlawfully terminated the contract and was in repudiatory breach.

It was agreed that as at 17 January 2007, Reinwood would have been entitled to deduct LAD’s from the sum otherwise payable. The three key conditions had been satisfied:

1. The architect had issued a certificate of non-completion;
2. Reinwood had told Brown in writing that it might deduct LAD’s; and
3. Reinwood had given the necessary withholding notice.

However Brown argued that once the architect had granted an extension of time, Reinwood no longer had any right to deduct or claim LAD’s in reliance upon the notice of non-completion. Once the certificate is cancelled, the withholding notice ceases to have any effect and cannot be relied on.

Brown submitted that the 17 January notices did not of themselves give rise to a substantive right to deduct LAD's. They were merely procedural machinery which allowed Reinwood to exercise such entitlements as the contract gave it. Without the substantive rights, the notices were of no significance. If having made payment of the sum due on an earlier certificate, it later transpires that a contractor was entitled to an extension of time, any LAD's previously deducted fall to be repaid, they will be repaid within a reasonable time. It does not avoid the need for the employer to pay the amount due to the contractor under the relevant interim certificate by the final date for payment and cannot be used to circumvent that payment regime.

The Court of Appeal disagreed. The critical question was what sum was properly due on the final date for payment. The sole question the Court of Appeal was concerned about was the effect of the cancellation of the certificate of non-completion under clause 24.1 by the grant of an extension of time.

In the view of LJ Dyson, where the 3 conditions are satisfied, the right to deduct the amount of LAD's specified in a notice given pursuant to clause 30.1.1.4 crystallises on the giving of the notice.

The contract did not contain any provision to the effect that an employer's entitlement to deduct LAD’s at the final date for payment depends on, or must be calculated by reference to, the completion date fixed at any time other than that fixed at the date of the notice. Just because a change of circumstances defeats one pre-condition for the giving of a notice (a valid certificate of non-completion), the entitlement to do what the notice provided is not also defeated.

Provided that the notice of an intention to deduct LAD’s has been validly given, there is no additional requirement that the underlying condition for issuing a notice should continue to subsist at the final date for payment. The Court of Appeal noted that notices serve an important purpose in this contract; they reduce uncertainty. They were not "mere procedural machinery", but an important part of the contractual machinery. The Court of Appeal was clear that the machinery provided by the contract is clear and straightforward and produces a workable and commercial scheme. No additional words are required either by necessary implication or as a matter of construction.

The position was clear where the conditions for giving a notice of intention to deduct were satisfied, the right to deduct the amount of LAD’s specified crystallised on the giving of the notice. The contract made express provision for a certificate of non-completion to be cancelled upon the fixing of a later date for completion. It was significant that there was no similar provision for the cancellation of a notice to deduct where a certificate for completion has been cancelled. Although a notice cannot be given unless a certificate for non-completion has been issued by the architect, its continuing efficacy does not depend on the continuing existence of the certificate and therefore does not cease to be effective when a certificate of non-completion is cancelled by a subsequent extension of time.

It followed that Reinwood had paid the amount properly payable in respect of the interim certificate and Brown had not been entitled to give notice of default.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.