So much for common sense

The Law Lords are having a high old time with the Construction Act – first there was Melville Dundas, now it’s Reinwood vs Brown. Both come down in favour of the employer, but will our industry understand why?

“The question is what is the effect on the money due when an extension of time is granted just before the day the cash ought to be in the builder’s hands”

In the end the score was 8:1. Eight judges saw this business of the withholding notice, deduction of liquidated damages, extension of time and architect’s certificates in favour of the employer. One saw it in favour of the contractor. And yet I bet many a construction industry wallah would vote the other way. Let me tell you the story.

L Brown & Sons was the builder. The project was 59 apartments in Castlefield, Manchester. The employer was Reinwood. The contract was JCT 98. Completion was due 18 October 2004. If late, £13,000 liquidated damages (LAD) applied. Come 14 months after the due completion date, the works were still not at practical completion. Not to worry; extensions of time were granted by the architect all the way up to 14 December 2005. He then issued a “certificate of non-completion”. That little ticket then allowed the employer to begin deducting £13,000 a week. So, when payment certificate number 29 was issued, the employer notified the builder that he would deduct £13k a week. It came to £61,629. The remaining £126,000 was then paid to the builder and all that was very ordinary. It was paid on 20 January.

The story then lead to nine judges mulling over our beloved Construction Act. Remember, the cash balance was paid on 20 January – five days early. It so happened that on 23 January the architect granted an extension of time up to 10 January. Thank you, said the builder. Then he said to the employer that the deduction of LAD came down from £61,000 to £12,000. So, said the builder, he was therefore underpaid. In other words, the architect’s extension of time meant that the period for deducting LAD at £13,000 a week was very much less. But the employer wouldn’t budge.

Within days of asking for payment of the now wrong amount of LAD and getting refused, the builder served a notice to terminate the contract. Next day the employer stumped up £49,000, but still the builder said because the true amount due had not been paid on time, there was a breach.

The question to be answered is what is the effect on the money due when an extension of time is granted just before the day the cash ought to be in the builder’s hands?

First, we know that the builder had requested an extension of time and while the architect was mulling that over, he quite properly calculated the amounts of money due in the next interim certificate. It was dated 14 December; then there is the period of days between payment certificate and final date for payment. In that period the employer properly notified an intention to withhold £61,000 LAD. But before the final date for payment the architect, also properly, awarded an extension of time so reducing the entitlement to LAD. And there is the rub: when does the entitlement to the reduced LAD kick in? The builder said straightaway, so please reflect that in the cheque. No, no, said the employer, too late. He, the employer, wanted to keep the amount withheld until the next time money was due under an interim certificate.

Anyway these two parties dug in. There was a High Court trial. The result was one, nil to the builder. But in the Court of Appeal, it became 3:1 to the employer (I told you about it on 13 July 2007). The builder now got permission to come to the House of Lords. The facts were that by the time the money was due to be paid, the right to withhold all the money had disappeared. The House of Lords looked at the JCT rules. The rules required a certificate of non-completion and a withholding notice given in time. Since that was all done as per JCT, those rules would be applied. “Any other conclusion,” said Lord Neuberger, “would fly in the face of commercial common sense.” My suspicion is that the builder did apply commercial common sense to all this. And I think the one judge out of nine who agreed with the builder also did. The JCT document is a commercial tool for commercial people as understood by commercial people. Wrong. It is a tool that the court tells us is understood by commercial people.

Not the same is it?

Readers are invited to forward recent judgments for reporting in this column (with full acknowledgement) to: Tony Bingham, 3 Paper Buildings, Temple, London EC4Y 7EU. DX: 37164 Biggleswade

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