New House of Lords decision supports 1996 Construction Act:
Reinwood Limited v L Brown & Sons Limited

Summary

A recent House of Lords decision supports the rationale behind the 1996 Construction Act. It gives full effect to a withholding notice, valid and effective at the time of its issue, even though the factual circumstances it relied on had changed by the final date for payment.

Why is this important to you?

Section 111 of the 1996 Act (which deals with withholding notices) is designed to bring certainty and clarity as to what and why any payment is being withheld. This decision gives further comfort to issuers of timeous and valid withholding notices that they will be upheld.

Detail
           
The dispute which was the subject of the appeal arose out of a contract issued on the JCT Standard Form of Building Contract 1998 Edition.  The court was asked to decide how the provisions relating to damages for non-completion and those relating to extensions of time interrelated. 

The facts were, briefly, as follows:

14 Dec 2005 11 Jan 2006 17 Jan 2006 20 Jan 2006 23 Jan 2006 25 Jan 2006

Architect issues non-compliance certificate Architect issues interim payment certificate Employer serves withholding notice deducting liquidated damages Employer pays interim certificate net of deduction Architect issues extension of time Final date for payment of interim certificate

In other words, the employer had served a withholding notice timeously, deducting liquidated damages for the contractor's delay in reliance on the architect's earlier non-completion certificate.  Three days after the sum stated in the interim certificate had been paid to the contractor (after deduction of the withheld amount), but prior to the final date for payment of the interim certificate, the architect granted an extension of time which decreased the amount of liquidated damages payable. 

The question for the House of Lords was whether the employer was in default, in terms of the contract, for not paying the balance of the amount due to the contractor before the final date for payment; or, in other words, whether the Contractor's argument was correct and the extension of time deprived the employer of the right to withhold in reliance on the non-completion certificate.

Whilst the House of Lords found that, in terms of the contract, the employer must, within a reasonable time, re-pay the liquidated damages after a new completion date has been set, and that the effect of the extension was to cancel the December 2005 non-completion certificate upon which the employer's rights to deduct depended, such cancellation was not retrospective in its effect.  Thus, the employer's withholding notice, issued in reliance on the then valid non-completion certificate, itself remained valid notwithstanding the subsequent "cancellation" of that certificate.

An Unanswered Question

The House of Lords went on to consider whether the employer would still have been successful if the extension of time had been granted after the service of the withholding notice, but before the employer had actually paid out on the interim certificate.  Given that arguments could be run either way and the answer to that question was not "tolerably clear", it declined to express any view.

David Scott Partner Construction & Engineering Team Tel. +44 (0)131 777 7023 david.scott@mcgrigors.com

Sheona Campbell Solicitor Construction & Engineering Team Tel. +44 (0)131 777 7454 sheona.campbell@mcgrigors.com

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