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

Under a construction contract, the cancellation of a certificate of non-completion by a later extension of time ordinarily operates prospectively. An employer who has served an effective withholding notice and made the notified payment before the extension may rely on the certificate as it stood when payment was made.

The later extension creates a separate obligation to pay or repay the excess liquidated damages. It does not retrospectively place the employer in default in respect of the earlier payment. Contractual payment provisions designed to implement the Housing Grants, Construction and Regeneration Act 1996 should be construed consistently with the statutory policy that advance notices enable parties to know where they stand. A sum certified for payment becomes due when the certificate is issued; the final date for payment is the deadline after which non-payment attracts serious contractual consequences.

Reinwood Ltd employed L Brown & Sons Ltd under the JCT Standard Form of Building Contract 1998 Edition to construct apartments. Following a certificate of non-completion, Reinwood served notices and deducted liquidated and ascertained damages from an interim payment. It made the resulting payment before the architect granted an extension of time, but the extension was granted before the contractual final date for payment.

The contractor contended that the extension cancelled the non-completion certificate and retrospectively deprived the employer of its right to make the deduction. It alleged a payment default capable of supporting determination of its employment under the contract. The Court of Appeal, in [2007] EWCA Civ 601, held that the withholding notice remained effective notwithstanding cancellation of the certificate. The central issue before the House was whether that interpretation correctly reconciled the contractual provisions governing non-completion damages, extensions of time and interim payments.

1. Appeal dismissed unanimously. Lord Neuberger delivered the leading speech. Lord Scott agreed with his reasons; Lord Hope, Lord Walker and Lord Brown also agreed that the appeal should be dismissed.

2. Per Lord Neuberger, once the contractual preconditions had been satisfied and the employer had served a valid withholding notice, the parties were ordinarily entitled to proceed on the basis that payment could properly be made in accordance with it. The detailed notice procedure reflected sections 110 and 111 of the Housing Grants, Construction and Regeneration Act 1996. Its purpose included enabling the parties to know in advance where they stood.

3. Per Lord Neuberger, the architect's later extension of time cancelled the original certificate of non-completion, but the cancellation was not retrospective. The ordinary meaning of cancellation did not undo a payment which was correct when made. Because the employer paid before the extension was granted, it was entitled to deduct the liquidated damages specified in its effective notice. The later extension did not make the employer's earlier payment a default under clause 28.2.1.

4. Per Lord Neuberger, the contractor was protected by the separate obligation in clause 24.2.2. The extension gave it a right to payment or repayment of the liquidated damages attributable to the extended period. As the clause specified no payment date, section 110(1) engaged the default provisions in paragraphs 7 and 8 of Part II of the Scheme contained in the Scheme for Construction Contracts (England and Wales) Regulations 1998.

5. Per Lord Neuberger, the amount in an interim certificate became due when the certificate was issued. The contractual final date for payment was a later deadline, non-compliance with which carried serious consequences. The contract had to be construed as satisfying section 110(1), where that construction was possible.

6. Lord Hope reasoned that contractual conditions intended to implement the statute should be construed in its light. An effective withholding notice remained available to the employer unless the dispute was referred to adjudication, while any excess deduction had to be repaid within the applicable short period. Lord Walker agreed that a later extension could not retrospectively alter the fact that the sum paid had been properly payable when payment occurred.

7. The House left open the different situation in which an extension is granted after service of the withholding notice but before the employer actually makes payment. The point had not been argued and its answer was insufficiently clear.

1. House of Lords — The contractor's appeal was dismissed unanimously. The Court of Appeal's interpretation was upheld: [2008] UKHL 12.
2. Court of Appeal — Dyson LJ, with whom Mummery and Arden LJJ agreed, held that a valid clause 30.1.1.4 notice did not cease to be effective when the certificate of non-completion was cancelled: [2007] EWCA Civ 601.