LADs behaving badly

The House of Lords has upheld a Court of Appeal judgment from 2007, which confirmed that an employer is entitled to deduct liquidated and ascertained damages (LADs) under a JCT contract, even where the contract period is subsequently extended and the employer is no longer entitled to LADs.

Reinwood Ltd v L Brown & Sons Ltd is a significant decision for contractors because it means employers can offset LADs against any payment due to them. If this happens, the contractor will have to await a refund under the contract. It cannot rely on the underpayment to claim a default or breach of contract against the employer.

In December 2005, Brown & Sons Ltd, the contractor, applied for an extension of time under JCT Standard Form of Contract, 1998 Edition with Quantities. The architect then issued a certificate of non-completion under clause 24.1, and an interim certificate, number 29, showing the net amount for payment as £187,988. The final date for payment was 25 January 2006.

On 17 January 2006, the employer, Reinwood, issued a notice under clause 24.2 of ‘intention to deduct from monies due to you under interim certificates issued after 14 December 2005 liquidated and ascertained damages…for the period from 14 December 2005 up to the date of practical completion’; and a notice confirming its intention to withhold £61,629 in LADs due under interim certificate 29.

On 20 January 2006, Reinwood paid £126,359. Three days later, the architect granted an extension of time until 10 January. On 24 January, Brown & Sons wrote to Reinwood, stating that the extension of time and revised completion date meant it was entitled to withhold no more than £12,326 for LADs. Reinwood failed to make further payment before 26 January. Brown & Sons served a notice of default. Reinwood paid the further sum of £49,303 (£61,629 minus £12,326) on 1 February.

On 28 June 2006, Reinwood should have paid £39,981 under certificate number 34. That sum was not paid and on 4 July Brown & Sons served notice of determination, relying in part on the notice of 26 January. It then left the site. Reinwood sued for breach of contract. Brown & Sons argued it was Reinwood who was in breach of contract, for failing to pay the sums due to it under the various certificates.

Lord Justice Dyson said in the court’s view ‘the subsequent grant of an extension of time did not defeat the right to deduct the amount of LADs specified in a valid notice… The contract makes express provision for a certificate of non-completion to be cancelled upon the fixing of a later date for completion. In my view, it is significant that there is no similar provision for the cancellation of a notice under clause 30.1.1.4 where a certificate of non-completion has been cancelled.’

The contract did not provide that Reinwood’s entitlement to deduct LADs at the final date for payment depended on, or must be calculated by reference to, the completion date fixed at any time other than on the date of the notice. It did not follow that, because a change of circumstances defeated a pre-condition for giving a notice (a certificate of non-completion), the entitlement to do what the notice provided was also defeated.

But any LADs so deducted must be repaid pursuant to clause 24.2.2. It is common ground that, as the judge said, this must be done within a reasonable time. In many cases, knowing that he will have to repay within a short time, the employer may decide not to exercise his right to deduct the amount of LADs specified in the notice.

Alexandra Anderson is a partner at City law firm Reynolds Porter Chamberlain