The highest court in the land has just given its second decision on the Construction Act. Never mind the parties, it’s two wins out of two for the JCT…
Last April the highest court in the land decided its first Construction Act case (Building, 11 May 2007). While we had to wait nine years for this, it has taken less than a year since then for the House of Lords to give a second decision concerning the act.
The new case, Reinwood vs Brown, will prove less controversial than Melville Dundas. It does not criticise the act’s wording as Melville Dundas did or challenge how the act applies to the same extent. However, unfortunately, like Melville Dundas, it does not answer all the questions it poses.
In Melville Dundas the House of Lords held that an employer could withhold payment even though it had not issued a withholding notice. This was because of events after the final date for payment (the contractor’s insolvency) and the operation of an act-compliant JCT-type contract (the employer validly determining the contractor’s employment and suspending the contractor’s right to payment).
One major issue left open by Melville Dundas was whether a payer who has not given a withholding notice might nevertheless withhold payment in respect of a defect that was hidden when the notice deadline passed.
In Reinwood the employer was again successful. This time, though, the employer did give a withholding notice. However, events supervened before the final date for payment that undermined the employer’s ground for withholding.
A summary of the facts of the case can be read above in Tony Bingham’s column. The House of Lords said that the employer was entitled to act as it did, and was not in default. The employer had followed the payment machinery of the JCT contract and issued a withholding notice as it was allowed to do. The fact that a subsequent event (the architect’s extension of time) undermined the factual basis for claiming liquidated damages did not also, retrospectively, remove the legal basis of the employer’s claim. While the employer was not obliged to repay the excess liquidated damages immediately the architect granted an extension of time, it was obliged to repay the £49,000 within 17 days (under the statutory Scheme because the JCT does not specify a repayment date).
One cannot be sure whether this is a rare case of a payer benefiting from making early payment
Lord Neuberger, who gave the leading opinion, queried whether the result would have been different had the employer paid the £126,000 after the architect extended the date for completion. That is: paid in reliance on a withholding notice that was no longer accurate at the time of payment. The question was not answered, so one cannot be sure whether this is a rare case of a payer benefiting from making early payment.
However, it highlights a pitfall of granting extensions of time just before final dates for payment. In such situations cautious employers might only deduct the reduced sum of liquidated damages.
This trap for the unwary may widen if and when the Construction Act is amended under the government’s last-published proposals. The act would then require payers to notify deductions of liquidated damages from interim payments earlier than at present (in payment notices rather than withholding notices). This would lengthen the period between the notice and the final date for payment when an extension of time might be given that undermines the notice.
Reinwood does not challenge the application of the Construction Act to quite the extent of Melville Dundas and nor does it cast any light on what Melville Dundas means. But like Melville Dundas, it shows the benefit of a relatively comprehensive, act-compliant, contractual payment regime.
It is interesting that in Reinwood the Construction Act is mentioned for the first time in the Law Lords’ opinions, having not been mentioned once in the two courts below. Their preparedness to hear the appeal so soon after deciding their first Construction Act case perhaps demonstrates a concern about the act’s application. This is a concern that many may share as the body of cases on the Construction Act continues to mount.
Rupert Choat is a partner at CMS Cameron McKenna