Reinwood Ltd v L Brown & Sons Ltd

Under a JCT building contract, an employer’s right to deduct liquidated and ascertained damages crystallises when the contractual conditions are satisfied and a valid withholding notice is given. A later extension of time cancels the certificate of non-completion, but does not retrospectively invalidate the notice or deduction. Any sum subsequently becoming repayable must be repaid within a reasonable time. The notice is a condition precedent and an important part of the contractual payment machinery, not mere procedure. A contractor cannot therefore rely on non-payment of the deducted sum as a specified default where the employer paid the amount properly payable.

The appellant employer engaged the respondent contractor under a JCT Standard Form of Contract, 1998 Edition, for the construction of apartments. After a certificate of non-completion and notices of intention to deduct liquidated and ascertained damages, the employer deducted £61,629 from an interim certificate.

The architect subsequently granted an extension of time, reducing the damages attributable to the relevant period. The contractor treated the employer’s failure to pay the additional sum as a specified default and later determined its employment under the contract. The High Court held that the determination was valid. The employer appealed, raising the question whether the later extension of time cancelled the earlier deduction notice as well as the certificate of non-completion.

Appeal allowed unanimously. Lord Justice Dyson gave the leading judgment. Lady Justice Arden and Lord Justice Mummery agreed.

1. The three conditions for deduction from interim certificate no 29 were satisfied when the employer gave its notice on 17 January 2006: an architect’s certificate of non-completion, prior written information that liquidated damages might be deducted, and a notice under clause 30.1.1.4 given within the prescribed period.
2. Once those conditions were satisfied, the employer’s right to deduct the amount specified in the clause 30.1.1.4 notice crystallised. Clause 24.1 expressly provided that a later Completion Date cancelled the certificate of non-completion. The contract contained no corresponding provision cancelling an already valid deduction notice.
3. The continuing effectiveness of the notice did not depend on the continuing existence of the certificate. There was no additional requirement that the condition supporting the giving of the notice should subsist on the final date for payment. The notice was a condition precedent to deduction and an important part of the contractual payment machinery.
4. Clause 24.2.2 required any liquidated damages subsequently shown to be repayable to be repaid within a reasonable time. It did not convert the obligation to pay the amount properly due at the final date into an obligation merely to make a later repayment, but it operated alongside the valid deduction right.
5. A Bell & Son (Paddington) Ltd v CBF Residential Care and Housing Association 46 BLR 102 was distinguished. It concerned an earlier form of contract and its conclusion that the deduction notice fell with the superseded certificate did not follow under the present wording.

The employer had therefore paid the amount properly payable under interim certificate no 29. The contractor was not entitled to rely on the alleged non-payment as a specified default under clause 28.2.1.1. The appeal was allowed.

1. Court of Appeal (Civil Division) allowed the employer’s appeal, holding that a valid deduction notice remained effective after the certificate of non-completion was cancelled by a later extension of time: [2007] EWCA Civ 601.
2. High Court of Justice, Queen’s Bench Division, His Honour Judge Gilliland QC, held that the contractor’s determination of its employment under the contract was valid.