Lord Hope of Craighead, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord Brown of Eaton-under-Heywood, Lord Neuberger of Abbotsbury:

Judgment delivered 22 February 2008

The Facts

The appellant contractor, Brown appealed against a Court of Appeal decision which had held that Brown had not been entitled to determine a contract (JCT Standard Form 1998 edition) between it and the respondent employer, Reinwood.

Brown had claimed that Reinwood had unfairly withheld a sum which was due under the contract. There was a specified completion date under the contract as well as provisions for extensions of time (“EOT”), damages for non-completion and the right of the contractor to determine the contract on certain specified defaults by the employer.

On 14 December 2006, Reinwood had issued a Certificate of Non-compliance “(CNC”) which was a condition precedent under the contract to Reinwood’s entitlement to LADs. On 11 January 2007, Reinwood then issued an interim payment certificate (“IPC”) in which the final date for payment was 25 January 2007. On 16 January 2007, the Employer was informed by the architect that it was about to issue an EOT which would set a later completion date. On 17 January 2007, Reinwood issued a Withholding Notice based on the LADs to which it become entitled on the strength of the CNC of the previous December.

On 20 January 2007, Reinwood paid Brown the sum stipulated under the IPC, less the value of the LADs claimed. On 23 January, the architect issued an EOT to 10 January 2007 thus making the CNC which formed the basis of the withholding notice invalid. The following day Brown ordered Reinwood to pay the outstanding balance due under the IPC by 25 January, the final date for payment. Reinwood did not pay by the due date and citing this as a specified default under the contract Brown determined its employment. Brown submitted that Reinwood was entitled to rely on the CNC at the time it served the Withholding Notice. However, Reinwood had lost that entitlement by the final date for payment since it could no longer rely on the CNC as a basis for withholding payment from Brown.

Under a decision in the Court of Appeal it was held that Reinwood’s right to LADs crystallized at the time of the Withholding Notice thus upholding its right to levy LADs. The effect of the EOT meant that the balance of the damages properly due to Brown should be paid in a reasonable time though not by the final date for payment. Brown appealed to the House of Lords.

Issues and Findings

Was Reinwood entitled to withhold the balance of the LADs from Brown?

Yes. The effect of the EOT did not remove Reinwood’s right to rely on the CNC.

Would the decision have been different if the EOT had been granted before the IPC had been issued?

In those circumstances, Reinwood would not have been entitled to the LADs as a result of non-completion since the EOT would have cancelled out the act of non-completion at the time the IPC was issued on 11 January 2007.

What if the EOT had been issued before the date on which Reinwood made the payment in advance of the due date?

It was not clear, except that it was a deciding factor that Reinwood had made the payment early in reliance on its Withholding Notice.

Commentary

Although the effect of the extension of time was to cancel the non-completion certificate, such a cancellation was not retrospective in its effect. Contractors will have to be careful if they seek to rely on an EOT that falls before the final date for payment as they may still suffer from a reduced payment in interim LADs. More importantly, the contractor apparently cannot rely on the “final date for payment” where payment by the employer has been made before the due date. In those circumstances it remains unclear when the repayment of LADs would be due. One thing is clear, however, the contractor cannot rely on the employer’s failure to repay the balance as valid grounds for determining the contract.