Judgments - Reinwood Limited (Respondents) v L Brown & Sons Limited (Appellants)

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30.  Section 108 of the 1996 Act entitles any party to a construction contract “to refer a dispute arising under the contract for adjudication under a procedure complying with this section". Section 109 requires every construction contract, save one estimated to last for less than 45 days, to contain provisions for stage payments, the parties being free to agree the terms of those provisions.

31.  Section 110 (1) provides that:

“Every construction contract shall-

(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and (b) provide for a final date for payment in relation to any sum which becomes due.

The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment.”

Section 110 (2) requires a construction contract to provide for a notice to be served “not later than 5 days after the date on which a payment becomes due from him under the contract", specifying the amount of the payment he proposes to make. There is no sanction if such a notice is not served or is served late.

32.  Section 111 is in these terms:

“(1) A party to a construction contract may not withhold payment after the final date for payment of a sum due under the contract unless he has given effective notice of intention to withhold payment. The notice mentioned in section 110 (2) may suffice as a notice of intention to withhold payment if it complies with the requirements of this section.

(2) To be effective such a notice must specify…the amount proposed to be withheld….and must be given not later than the prescribed period before the final date for payment.

(3) The parties are free to agree what the prescribed period is to be….”

33.  Subsection (3) of each of sections 109, 110 and 111 states that in the absence of such agreement the relevant provisions of “the Scheme for Construction Contracts” are to apply. The scheme (“the Scheme”) applicable in the present instance is that contained in the schedule to The Scheme for Construction Contracts (England and Wales) Regulations 1998, S.I. 1998/649.

34.  The contractor took possession of the site on 11 August 2003. Although there were many other disputes between the parties, the facts relevant to the present dispute are within a small compass. On 7 December 2005, the contractor made an application for an extension of time. On 14 December 2005, the architect issued a certificate of non-completion (“the December non-completion certificate”) under Clause 24.1. On 11 January 2006, he issued interim certificate no 29 (“the interim certificate”), showing a net amount payable of £187,988. Pursuant to Clause, the final date for payment of this sum was 25 January.

35.  On 17 January, the employer served two notices on the contractor. The first notice (“the preliminary notice”) was stated to be under Clause 24.2, and it said that it was the employer’s “intention to deduct from monies due to you under Interim Certificates issued after 14 December 2005 [LADs]…for the period from 14 December 2005 up to the date of Practical Completion of the Works". The second notice (“the withholding notice”) stated that the employer proposed to withhold £61,629 LADs from the sum due under certificate no. 29, and that “[i]n accordance with Clause", which it is common ground should be treated as a reference to clause, the employer proposed to pay £126,359 (the difference between the certified amount and the claimed LADs).

36.  Three days later, on 20 January, the employer paid the contractor £126,359. On 23 January, pursuant to the contractor’s request, the architect granted an extension of time until 10 January 2006 (“the January extension”). The following day, the contractor wrote to the employer stating that the effect of that extension was to reduce the LADs to which the employer was entitled to £12,326, and that the amount due under certificate no. 29 was therefore £175,662. The employer nonetheless made no further payment, and, on 26 January, the contractor served notice of default under Clause The following day the employer stated that it would pay the sum of £49,303 which it duly did on 1 February. Thereafter, the contractor claimed to be entitled to determine the contract under clause 28 on a number of grounds, the only relevant one for present purposes being the alleged failure of the employer to pay the sum due under the interim certificate in full by the final date for payment, namely 25 January 2006.

37.  As at 20 January 2006, when it paid the sum due under the interim certificate, the employer was entitled to rely on the December non-completion certificate to justify its withholding £61,629 LADs from the payment due under the interim certificate: that is, of course, how the payment of £126,359 made on 20 January 2006 was calculated. However, the contractor argues that the January extension, crucially granted before the “final date for payment” of the sum due under the interim certificate, disentitled the employer from relying on the December non-completion certificate, so that the employer should have paid the whole of the £187,988 by the “final date for payment” of 25 January 2006. (This is a more extreme, but more principled, position than the contractor took in its letter of 26 January 2006.)

38.  There is no doubt that, if the January extension had been granted before 11 January 2006, the employer would not have been entitled to deduct the LADs resulting from the December non-completion certificate, as that certificate would have been “cancelled” under clause 24.1 as a result of the January extension, by the time of the issue of the interim certificate. Equally, there is no doubt that, if the January extension had been granted after 25 January 2006, the employer’s deduction of the LADs based on the December non-completion certificate would have been unassailable, as that certificate would not have been cancelled under clause 24.1 by the January extension until after the “final date for payment” under the interim certificate. The difficulty in this case arises from the fact that the January extension was granted after the date of issue of the interim certificate, but before the “final date for payment” thereunder.

39.  The contractor’s case is that, although the employer was apparently entitled to rely on the December non-completion certificate when it served the preliminary notice and the withholding notice on 17 January, and when it actually paid under the interim certificate, the fact that that entitlement did not exist by the final date for payment deprives the employer of the right to rely on the December non-completion certificate in relation to payment under the interim certificate.

40.  At least on the face of it, the effect of clause 24.2 appears clear. Provided the two preconditions in what I have characterised as paras [a] and [b] are satisfied, clause entitles the employer to give notice under clause Although not spelt out, it must, in my view, follow (save, perhaps, in special circumstances) that, where the two preconditions are satisfied and the employer has served a withholding notice under clause, both parties should be entitled to proceed on the basis that payment will, and can properly, be made in accordance with that notice. Any other conclusion would fly in the face of commercial common sense: the detailed procedures set out in clause 24.2 would appear to have little point if they did not, at least normally, govern the parties’ subsequent rights and obligations. That point is reinforced by the fact that the notices referred to in clauses 24.2.1[b] and are, respectively, the notices required by sections 110 and 111 of the 1996 Act, and part of the purpose of those sections is to enable parties to a construction contract to know where they stand (see e.g. Melville Dundas Ltd (in receivership) v George Wimpey UK Ltd [2007] UKHL 18, [2007] 1 WLR 1136, at para 19 per Lord Hoffmann).

41.  If that analysis applies in this case, it would follow that the employer was entitled to make the deduction from the sum due under the interim certificate that it made in respect of the LADs based on the December non-completion certificate. The issue of that certificate satisfied the first precondition, in clause 24.2.1[a], the service of the preliminary notice satisfied the second pre-condition, in clause 24.2.1[b], and the service of the withholding notice complied with clause (The fact that the preliminary notice was served later than the date identified in clause - and in section 110(2) - does not invalidate it, not least because there is no reference to such date in clause 24.2.1[b].)

42.  So the question is whether, in accordance with the submission of the contractor, the issue of the January extension, after the employer had both served the withholding notice and paid on the assumption that he had the right to rely on the December non-completion certificate, deprived the employer of that right. In my judgment, in agreement with the Court of Appeal, the issue of the January extension did not have that effect.

43.  It is true that, by virtue of clause 24.1, the effect of the January extension was to “cancel” the December non-completion certificate, upon which the employer’s right to deduct depended. However, such a cancellation was not retrospective in its effect. That is not the normal meaning or effect of the word “cancel". Indeed, it would be an absurd meaning to give the word here. It would mean that, even if the January extension had been granted after 25 January, it would have resulted in the employer having underpaid on the interim certificate.

44.  Once one accepts that the effect of the January extension was not to cancel the December non-completion certificate retrospectively, it appears to me to follow 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.

45.  In my view, far from providing otherwise, the contractual provisions support this conclusion. As already mentioned, there is the policy (reflected in the 1996 Act) that the parties should know in advance where they stand. The contractor’s case appears to me to be inconsistent with that policy. Not merely 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.

46.  Such an outcome would also be rather unfair on an employer: he would have underpaid due to an event which occurred after he had paid. It would also be unsatisfactory if he had to instruct his bank, or find some other method of payment, at the last minute. Thus, on the contractor’s case, if the January extension had been granted on 24 January, the day after it was it was in fact granted, the employer would have had to find and pay over to the contractor around £50,000 or £60,000 on one day’s notice.

47.  Further, if, as should happen, but did not happen here, the architect issues a new certificate of non-completion at the same time as the extension of time, it may well (as it would in this case) come too late for the employer to serve a fresh withholding notice under clause, and therefore to take advantage of his right of deduction under the new certificate, given the time limits for the service of that notice. (This would be particularly unfair where the new certificate identified an earlier completion date than had been identified in the certificate on which the employer had relied.) The fact that clause 24.2.3 is intended to enable the employer to rely on his clause 24.2.1[b] notice in such a case underlines the point that this consequence of the contractor’s argument casts doubt on its correctness.

48.  A contractor’s position is properly protected if the employer’s argument is correct. On the assumption that the employer was entitled to rely on the December non-completion notice when it paid on 20 January, the effect of the January extension on 23 January was not only to cancel that notice under clause 24.1; it was also to give the contactor the right to be paid the amount retained - see clause 24.2.2. No date for payment is included in that clause. The Court of Appeal said that the contractor’s right in those circumstances was to be paid within a reasonable time of the grant of the January extension, which (rightly in my view) they indicated would normally be a matter of days. However, it appears to me that section 110(1) is 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 (as it appears to have done) for payment of the sum of £61,629 or £49,303 (probably depending on whether the architect had issued a further non-completion certificate), whereupon the sum would have become due after 7 days, and the final date for payment would have been 17 days thereafter.

49.  It was argued by the contractor that this conclusion lies uneasily with the fact that the January extension had cancelled the effect of the December non-completion notice by 25 January, which was the date by which the interim certificate had to be paid. In my opinion, 25 January was the “final date for payment", not the date on which payment became due. A sum becomes due under a certificate when it is issued, and the “final date for payment” is the date by which failure to pay can have serious consequences for the employer. As my noble and learned friend, Lord Walker of Gestingthorpe, observed during the argument, the function of the “final date” is akin to making time of the essence of the payment as at that date. It is fair to say that the contract is not completely clear on this issue. However, section 110(1) required this contract to specify both a date “when” “payments become due under [it]” and “a final date for payment", and this requirement is inherent in section 110(2). As the contract has to comply with that requirement, it seems to me that it must be construed as so complying unless it is impossible to do so. I have no difficulty in reading clause as having the effect of rendering a payment under a certificate due as at the date of its issue; indeed, it is otherwise hard to see the purpose of the word ‘final’ in that clause.

50.  It was also argued by the contractor that accepting the employer’s argument could lead to abuse by employers. I do not agree. Unlike clause 30.1.4, which appears to contemplate the employer being able to rely on any deduction in his withholding notice, clause 24.2 only covers deductions which are claimed in reliance on a certificate of non-completion issued by the architect. Even where, as may well have been the position in this case, the deduction is made at a time when the employer has reason to believe that an extension of time will be granted in the near future, the contractor will be able to retrieve the monies very quickly after the extension is granted under clause 24.2.2, as already explained.

51.  It follows that, for my part, I would dismiss the contractor’s appeal. An outstanding question which should be mentioned is whether the employer would still have succeeded if the January extension had been granted after the service of the clause withholding notice, but before the employer actually paid out on the interim certificate (e.g. if the January extension had been granted on 18 or 19 January). It was not a point which was debated (as it does not strictly arise) and therefore it seems to me that we should only express a view on it if the answer is tolerably clear.

52.  There is undoubtedly a case for saying that the employer should not have succeeded on those facts. There is plainly a difference between paying in reliance on a withholding notice which is accurate at the time of payment and paying in reliance on such a notice which is no longer accurate at the time of payment. Further, clause 24.2.3 seems to refer to clause 24.2.1[b], but not to clause, which tends to suggest that it may not be possible to rely upon a withholding notice under the latter clause once the certificate of non-completion on which it is based is cancelled.

53.  However, there are arguments the other way. The principle that a withholding notice, valid when it is served, should be able to be relied on in relation to the payment to which it relates, even after its basis has been undermined, appears at least arguably consistent with the policy of the 1996 Act as discussed above. Further, the points that an employer could face practical difficulties in relation to payment where an extension of time is granted shortly before the final date for payment, and may unfairly lose his right to rely on a new certificate of non-completion because of the time limit in clause 24.2.1, appears to apply to a case where the extension of time is granted before actual payment pursuant to an interim certificate almost as much as it applies where the extension is granted after payment.

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