2 Property Law Journal 17 March 2008

CONSTRUCTION UPDATE

The Lords and the LADsIan Pease analyses the intricacies of extension of time clauses,in relation to a claim for liquidated and ascertained damages,and the service of notices

Ian Pease is an associatepartner at Davies ArnoldCooper, he specialises in construction and engineering law

For whom the Bell tollsIt has long been the case (see A Bell &Son (Paddington) v CBF Residential Careand Housing Association [1989]) that inorder to claim the right to deduce liqui-dated and ascertained damages (LADs),an employer has to have the benefit of a certificate of non-completion of theworks from the architect. This is becausecertainty is necessary where a provision(such as LADs) requires the employer to calculate an exact amount of daily damages.

The recent House of Lords case ofReinwood Ltd v L Brown & Sons Ltd [2008]concerned the interaction of this under-lying principle with the paymentprovisions under the Housing Grants,Construction and Regeneration Act 1996(the 1996 Act).

The matter in issue was whether, a right to deduct LADs having arisen,that was cancelled by an extension oftime being granted before the ‘final datefor payment’ under the contract. TheLords thought that it was not cancelledand, in so answering, endorsed the judgment of Dyson LJ in the Court ofAppeal.

Background case law Back in the A Bell & Son case in 1989,Judge Newey had decided that if a non-completion certificate was issued inrelation to a completion date that wasthen superseded by the subsequentextension of time, then that certificateceased to have effect. That seemed to be the received wisdom, being endorsedby the Court of Appeal six years later in JF Finnegan v Community HousingAssociation [1996].

However, Reinwood set up a certaintension between that principle and thepayment provisions under the 1996 Act.

There could be no doubt as to the routethat Dyson LJ would take in this case,given that when he was in theTechnology and Construction Court hewas responsible for much of the seminallaw on enforcing the 1996 Act’s paymentprovisions. What Dyson LJ held (the restof the Court agreeing with him) was thatif, by the time of the ‘withholdingnotice’, the conditions for the deductionof LADs from a payment certificate weresatisfied, then the employer is entitled todeduct the specified amount of LADs,even if the certificate of non-completionis cancelled by the subsequent grant ofan extension of time before the ‘finaldate for payment’ under the contract.

The relevant JCT clausesThe JCT contracts were of courseamended to reflect the 1996 Act withclauses 30.1.1.3 and 30.1.1.4 introducedto reflect ss110 and 111. Hence theemployer is required, before the finaldate for payment of an interim certifi-cate, to give written notices to thecontractor specifying what it is going topay and any amount proposed to bewithheld or deducted, together with thegrounds justifying the withholding ordeduction. Absent those notices theemployer has to pay the full certifiedsum.

Clause 24 is where we find the suc-cessor provisions to those considered byJudge Newey in A Bell & Son. Clause24.1 provides for the architect to issue acertificate that the contractor has failedto complete the works by the completiondate. However, if an extension of time isgranted after the issue of the non-completion certificate, the earlier certi-ficate is considered to be cancelled.Furthermore, by clause 24.2.1, before theemployer may deduct LADs, in addition

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CONSTRUCTION UPDATE

to the non-completion certificate, theemployer must inform ‘the contractor inwriting… that he may require paymentof, or may withhold or deduct, liqui-dated and ascertained damages…’.

Finally, the contractor is entitled toissue a default notice to the employerwhere the latter does not pay ‘by thefinal date for payment the amount prop-erly due to the contractor in respect ofany’ interim certificate. That led in thiscase to determination of the contract bythe contractor.

The issues in Reinwood The tension in this case arose as a resultof the timing of the various notices. Thechronology was as follows:

14 December 2005: Architect issues cer-tificate of non-completion (clause 24.1).

11 January 2006: Architect issues interimcertificate showing £187,988 as due.

17 January 2006: Employer issues clause24.2 notice of intention to deduct liquidated damages for period from 14 December 2005.

17 January 2006: Employer gives noticeunder clause 30.1.1.4 (the withholdingnotice) of intention to pay only £126,359,£61,629 being deducted for LADs.

20 January 2006: Employer pays £126,359.

23 January 2006: Architect grants exten-sion of time to 10 January 2006.

24 January 2006: Contractor complainsthat employer is now entitled to with-hold no more than £12,326 in respect ofLADs.

25 January 2006: Final date for paymentof Interim Certificate no 29.

26 January 2006: Contractor serves noticeof default under clause 28.2.1.1.

Thus by the ‘final date for payment’(25 January 2006), was the employer indefault?

The Court of Appeal thought not, theright to deduct LADs, it said, crystallis-ing upon the giving of the withholding

notice (17 January 2006). Whatever hap-pened thereafter was irrelevant. Hence,in the Court’s view, if the right to deducthas been fixed at that point in time thenthe deduction can be made, even if some-thing happens later during the paymentperiod that would otherwise underminethe facts justifying that deduction. Henceit was of no matter that the certificate ofnon-completion was cancelled before thefinal date for payment (25 January 2006).

The House of Lords concurred withthe Court of Appeal. Its reasoning was

Properly analysed, Reinwood merely goes todetermine the point in time where one assesses the

existence of the factors necessary to found anemployers’ right to set off LADs.

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CONSTRUCTION UPDATE

based, it said, on commercial commonsense. The parties had to know wherethey stood and the procedures in clause24.2.1 were of crucial importance. Thatclause states as follows:

Provided:

(a) the architect has issued a certificateunder clause 24.1 [the non-completioncertificate]; and

(b) the employer has informed the contractorin writing before the date of the final cer-tificate that he may require payment of,

or may withhold or deduct, [LADs], thenthe employer may, not later than five daysbefore the final date for payment of thedebt due under the final certificate,

either:

• 24.2.1.1 require in writing the contractorto pay to the employer [LADs]… or

• 24.2.1.2 give notice pursuant to clause30.1.1.4 [the withholding notice]… to thecontractor that he will deduct frommoneys due to the contractor [LADs]…

CommentSome commentators have concludedthat this case calls into question the ABell & Son case, but that is not so.Properly analysed, this case merely goesto determine the point in time whereone assesses the existence of the factorsnecessary to found an employers’ rightto set off LADs. The Court of Appealthought that it was the date on whichthe withholding notice was given, andthe House agreed.

The importance of notice Steria v Sigma Wireless Communications[2008] is not a construction case but, con-cerning as it does the procurement of acomputer system, there are distinct sim-ilarities; it was even procured on a formof process engineering contract. (Sigmawas the main contractor, and Steria itsspecialist sub-contractor in this case.)

The judgment is important for sev-eral reasons that concern the question ofgiving notice of delay and the contractadministrator then granting extension oftime. One of the big cases of last yearwas Multiplex Constructions v Honeywell[2007], a case that saw Jackson J stressingthe importance of giving notice of delay:

Contractual terms requiring a contractorto give prompt notice of delay serve avaluable purpose; such notice enablesmatters to be investigated while they are still current. Furthermore, suchnotice sometimes gives the employer

the opportunity to withdraw instructionswhen the financial consequences become apparent.

In Steria the focus was whether thenotice provision was a condition prece-dent to an extension of time being given.Clause 6.1 was fairly innocuous:

… If by reason of any circumstance whichentitles the contractor to an extension oftime… the sub-contractor shall be delayedin the execution of the sub-contractworks, then in any such case provided thesub-contractor shall have given within areasonable period written notice to thecontractor of the circumstances giving riseto the delay, the time for completion here-under shall be extended by such period asmay in all the circumstance be justified… (Emphasis supplied.)

It was contended by Sigma that thisform of wording (particularly the word‘provided’) meant that the notice was acondition precedent to the extension oftime being granted. The judge agreed.The reasoning comes in two stages.First, the existing words are clear intheir meaning. Secondly, the clause doesnot need some further express state-ment saying that unless written notice isgiven within a reasonable time the sub-contractor will not be entitled to anextension of time.

It must be said that this reasoningprobably lowers the bar on what most

lawyers would generally have perceivedas condition precedent wording, buttaken together with Jackson J’s words itconstitutes a resurgence of the contrac-tual notice. Notices are important. Theyare there for good commercial reasons.And now the courts are signaling thatthey will be enforced, particularly byfinding that they are gate-keepers toclaims for extensions of time.

Another finding of the court in thiscase shows that there has to be a certainformality in the giving of the notice or atleast that the information in the noticehas to come from the contractor, for thecourt said:

… the written notice must emanate from[the sub-contractor]. Thus for example anentry in a minute of a meeting prepared by[the engineer] which recorded that therehad been a delay… and that as a result thesub-contract works had been delayed,would not in my judgement by itselfamount to a valid notice under clause 6.1.

That being said, the notice was not afull claim for the effects of the allegeddelays. It did not have to spell out theconsequences, as the judge said:

I am unable however to accept [the con-tractor’s] submission that the noticemust go on to explain how and why therelevant circumstances have caused thedelay. That would be to import a require-ment for [the sub-contractor] to providea level of detail in the notice which goesbeyond the simple notification which isof the essence of the clause.

Overall, therefore, the overridingthing to take away from this case is theimportance (both from a commercialand ultimately legal point of view) ofthe giving of notice of delay. ■

Notices are important. They are there for goodcommercial reasons. And now the courts aresignaling that they will be enforced, particularly byfinding that they are gate-keepers to claims forextensions of time.

A Bell & Son (Paddington) v CBF Residential Care and Housing Association(1989) 46 BLR 102

JF Finnegan v Community Housing Association (1996) 77 BLR 22

Multiplex Constructions v Honeywell [2007] 1 BLR 195

Reinwood Ltd v L Brown & Sons Ltd [2008] UKHL 12

Steria v Sigma Wireless Communications [2008] CILL 2544

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