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When withholding notices become superceded

4 April 2008

 

The judgment in Reinwood Limited v L Brown & Sons Limited [2008] All ER 283 takes a look at aspects of the Housing Grants Construction & Regeneration Act 1996 ("the Act"), in particular the payment and withholding provisions. The central issue of the case was whether, after an employer had both served a withholding notice and paid on the assumption that he had a right to rely on a non-completion certificate, the employer was then deprived of that right, if before the final date for payment of that instalment an extension of time is granted thus cancelling the non-completion certificate.

 

This case concerned the construction of 59 apartments. The parties to the contract were Reinwood Limited ("Employer") and L Brown & Sons Limited ("Contractor"). The contract was a JCT standard form of contract, 1998 edition, with quantities incorporating amendments 1, 2 and 3 (the "Contract"). The original completion date for the project was 18 October 2004.

 

The project was delayed, and on 14 December 2005 a certificate for non-completion was issued by the Architect. Liquidated and Ascertained Damages ("LAD’s") became payable at a rate of £13,000 per week or part thereof.

 

On 11 January 2006, the Architect issued an interim certificate showing a net amount due to the Contractor in the sum of £187,988. The final date for payment of the sums due under this certificate was 25 January 2006. On 17 January 2006, the Employer issued two notices, one giving his intention to deduct LAD's from 14 December 2005 to the date of notice and another being a withholding notice under Section 111 of the Act giving notice of his intention to withhold the sum of £61,629 from the payment due under the interim certificate.

 

The Employer paid the balancing sum of £126,359 on 20 January 2006 some five days before the final date for payment. On 23 January 2006, after payment but before the final date for payment, the Architect issued an extension of time until 10 January 2006. The effect of the extension of time was to cancel the non-completion certificate (Clause 24.1).

 

In pure monetary terms, this meant that the Employer was no longer entitled to deduct the full £61,629 by way of LAD's, which was now £49,303 too much.  The question was whether the withholding notice could still be relied upon to withhold this sum even though after the date of issue of the withholding notice, a new certificate had been issued granting an extension of time.

 

The Contractor thought that the Employer could not rely upon the withholding notice. He wrote to the Employer, after receiving the award for an extension of time seeking payment of some of the monies withheld on the basis that the Employer was now entitled to withhold no more than £12,326 LAD's. The Employer did not pay the sum requested by the final date for payment.  Therefore, on 26 January 2006 the Contractor issued a notice of default under Clause 28.2.1.1. Clause 28 allows the Contractor to give the Employer notice of certain types of default, including a failure by the Employer to pay by the final date of payment the amount properly due to the Contractor in respect of any certificate. In response to the notice, the Employer informed the Contractor that he would make payment. A few days later he did so.

 

After payment and some months later, the Employer again defaulted upon payment under a certificate. This time, the Contractor gave notice referring to the previous default in January and terminated the Contract.

 

The Employer brought proceedings seeking a declaration that the termination by the Contractor was unlawful. The Contractor succeeded at first instance. The Employer appealed and the Court of Appeal allowed the Appeal taking the view that the Employer was entitled to withhold the monies in January 2006. The Contractor appealed to the House of Lords.

 

The Lords unanimously agreed with the Court of Appeal and found that the Employer was not in default. The payment provisions of the Act were considered in detail.

 

It was emphasised by the Lords that the aim of the Act particularly the provisions set out in Section 111 were to reduce incidences of set-off abuse and to allow the parties to understand exactly where they stand, as stated in Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18, [2007] 1 WLR 1136. At para 42 it states, "…Section 111 is primarily designed to reduce the incidence of set-off abuse by formalising the process by which the payer claims to be entitled to pay less than that expected by the payee."

 

The Lords had to decide whether the issue of the January extension, after the Employer had both served the withholding notice and paid in reliance upon the December non-completion certificate, deprived the Employer of the right to rely upon the non-completion certificate. The Lords agreed that the issue of the extension of time did not have the effect of retrospective cancellation of the non-completion certificate.  

 

The Lords took the view that the Contractor had adequate protection under the Act and the provisions within the Contract. Clause 24.2.2 of the Contract states:

 

"If, under Clause 25.3.3, the Architect fixes a later Completion Date…, the Employer shall pay or repay to the Contractor any amounts recovered, allowed or paid under Clause 24.2.1 for the period up to such later Completion Date."

 

It can be seen that the effect of the award for extension of time, was that the Employer then came under an obligation to pay to the Contractor those amounts to which he was no longer entitled to deduct as LAD’s. The Contract did not stipulate a date for payment of any sums to be paid pursuant to clause 24.2.2. The Court of Appeal considered that this sum became due for payment within a reasonable time. The Lords however, took the view that Section 110(1) of the Act would apply, and on that basis, the Contractor could apply for payment which would become due after seven days with the final date for payment being 17 days thereafter.

 

One question that was considered by the Lords but no answer was given, was whether the same would apply and would an Employer still succeed, if the January extension had been granted after the service of the withholding notice but before the Employer actually paid the interim certificate. In such a case, unlike this one, the Employer would know that the amount that he was paying was plainly wrong. He was making payment in reliance of a withholding notice that was no longer accurate at the time of payment. The answer to the question was not given by the Lords but the suggestion was that it would depend on the facts. For example, would the Employer have the necessary time to make the payment before the final date for payment? In such a situation, if the Employer knew of the inaccuracy and was therefore intending to deliberately gain an advantage over the Contractor by relying upon the withholding notice, this might persuade the Court to find in favour of the Contractor.

 

For more information please contact Shaun Tame or Shafim Kauser.

 

 

The content of this bulletin is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.