HGCR Act 1996
Reinwood Limited v L. Brown & Sons Limited [2008] UKHL 12

© Daniel Atkinson 2008 24 February 2008

Introduction

In Reinwood Limited v L. Brown & Sons Limited [2008] UKHL 12 the Employer relied upon a valid withholding notice to withhold liquidated damages from a payment made before the final date for payment.  In the subsequent period but before the final date for payment a further extension of time was granted reducing the amount of liquidated damages to be deducted.  The Employer did not pay the difference in liquidated damages before the final date for payment.  The Contractor argued that it was entitled to determine the contract due to the Employer's failure of the Employer to pay the sum due under the interim certificate in full by the final date for payment.

The issue before the House of Lords was whether a valid withholding notice ceased to be effective when a certificate of non-completion was cancelled by the subsequent grant of extension of time.

I reported the decision of the Court of Appeal in my article in Construction News Take Notice of Liquidated Damages. The House of Lords dismissed the appeal unanimously.  Neither the first instance decision nor the Court of Appeal considered the Housing Grants Construction and Regeneration Act 1996 in reaching their interpretation of the contract.  The interesting aspect of the House of Lords decision is the consideration of the 1996 Act in the interpretation of the payment provisions of JCT 1998.

The main facts were as follows:

1. The Architect issued a notice of non-completion on 14 December 2005.
2. The interim certificate for payment was dated 11 January 2006.
3. The final date for payment was 25 January 2006.
4. On 17 January 2006 the Employer issued a notice of intention to deduct liquidated damages and a notice to withhold £61,629 of liquidated damages from the interim certificate.
5. On 20 January 2006, before the final date for payment, the Employer paid the amount certified less £61,629.
6. On 23 January 2006 the architect granted an extension of time with the effect of reducing the LADs to £12,326, a difference of £49,303. 
7. The Employer did not pay the difference by the final date for payment but instead on 1 February 2006.

Observation on the 1996 Act

Lord Hope referred to Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18 (HL) BLR257 and repeated Lord Hoffman's observation that the purpose of the notice requirement of the 1996 Act was to enable the contractor to know immediately and with clarity why a payment was being withheld. Lord Hope stated that the meaning which was conveyed by the word "effective" in Section 111 was that, if the contractor did not refer the question to adjudication, the employer would not be in default if the amount of which he had given notice was withheld from the amount stated as due in an interim certificate.

Lord Hope held that the conditions of contract ought to be construed in the light of the provisions of the statute that they were intended to give effect to. The concept which was to be found in Section 111(1) was that of an effective notice. He held that the employer was entitled to deduct the liquidated and ascertained damages specified in his notice from the amount that was stated to be due in the interim certificate.

Lord Hope held that the Employer was obliged by JCT 1998 clause 24.2.2. to pay or repay any liquidated and ascertained damages that were recovered, allowed or paid under clause 24.2.1 after he had been informed by the architect of the fixing of the new completion date. This had to be done within a reasonable time after receipt of that information. The time allowed was short, having regard to the default provisions in the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649).

Lord Hope held that the Employer could reduce the amount of the deduction notwithstanding the terms of the notice that he had given under clause 30.1.1.4, but he was not in default within the meaning of clause 28.2.1 because he chose not to do so.

Interpretation of the Contract

Lord Neuberg gave leading judgment on the issue.

Lord Neuberg held that where the proper notices had been issued and the employer had served a withholding notice under clause 30.1.1.4, then both parties should be entitled to proceed on the basis that payment would, and could properly, be made in accordance with that notice. He considered that any other conclusion would fly in the face of commercial common sense. He considered that the the contract provisions for notice were the notices required by sections 110 and 111 of the 1996 Act.  Part of the purpose of those sections was to enable parties to a construction contract to know where they stood  Melville Dundas Ltd v George Wimpey UK Ltd [2007] UKHL 18 (HL) BLR257.

Lord Neuberg held that the issue of the January extension, after the employer had both served the withholding notice and paid on the assumption of the right, did not deprive the Employer of the right to rely on the December non-completion certificate. By clause 24.1 the effect of the January extension was to "cancel" the December non-completion certificate but that cancellation was not retrospective. That was not the normal meaning or effect of the word "cancel". It followed that, in making any payment before the January extension was granted, the employer was entitled to rely on that certificate, unless the provisions pursuant to which the payment was made provided otherwise. Otherwise it would be unfair to the Employer if he had to instruct his bank, or find some other method of payment, at the last minute. For instance, if the architect issued a new certificate of non-completion at the same time as the extension of time, it might come too late for the employer to serve a fresh withholding notice under clause 24.2.1.2, and therefore to take advantage of his right of deduction under the new certificate, given the time limits for the service of that notice.

Lord Neuberg held that the contractual provisions supported the policy in the 1996 Act that the parties should know in advance where they stood. Otherwise not only could neither party rely on a valid withholding notice as conclusively determining their rights and obligations with regard to payment on an interim certificate, but neither party could even rely on an actual payment, correct at the time it was made, as being effective.

Lord Neuberg stated that the effect of the January extension was not only to cancel that notice under clause 24.1 but also to give the contactor the right to be paid the amount retained under clause 24.2.2. No date for payment was included in that clause so that section 110(1) was engaged, and, as no time for payment is specified, the provisions of the Scheme, and in particular paras 7 and 8 of Part II, would apply. On that basis, after the grant of the January extension, the contractor could have applied for payment of the sum £49,303, whereupon the sum would have become due after 7 days, and the final date for payment would have been 17 days thereafter.

The issue whether the employer would still have succeeded if the January extension had been granted after the service of the clause 24.2.1.2 withholding notice, but before the employer actually paid out on the interim certificate, was not clearly obvious and not therefore decided.