The JCT standard form of contract provides a
specific contractual mechanism for deduction of Liquidated and
Ascertained Damages (“LADs”) by the employer in certain
circumstances if the construction project is not completed on time
(as do many other standard form construction contracts, although
the procedure in the JCT is more complicated than most). In a
recent case before the Court of Appeal the question was whether, if
the employer had followed the procedure laid down in the contract
for deduction of LADs, the later extension of time granted by the
architect could render that (previously valid) deduction of LADs
unlawful.
The court answered this question in the negative. The
employer’s right to deduct LADs crystallised when it issued
the notice of its intention to deduct LADs. Even though the
architect had subsequently granted an extension of time (which
effectively reduced the amount of LADs payable), it did not follow
that the original notice of intention to deduct LADs was
unlawful. Indeed, the JCT Contract specifically provided
that, notwithstanding any extension of time given by the architect,
the employer could continue to rely on a previous requirement in
writing that he could deduct LADs. All that it meant was that
the employer would have to repay any sums so deducted within a
reasonable time (often a matter of a few days). Arguably, as
the deduction was lawful, interest would not have been due under
the JCT form.
The issue was relevant because the JCT contract entitles the
contractor to determine the contract if an employer repeats a
previously specified default. The contractor had issued a
notice of default in respect of the allegedly unlawful deduction of
LADs. Then, following a later failure on the part of the
employer to pay sums due, the contractor issued a notice of
determination on the grounds of repeated specified defaults.
The Court of Appeal’s ruling meant that there had not been a
repeated specified default and therefore the contractor’s
notice of determination constituted a repudiatory breach of
contract.
Comment
Where building and engineering contracts contain machinery for
granting extensions of time and deducting LADs, an earlier
deduction generally does not become a breach of contract simply
because of a later adjustment to the completion date. The
contractor usually cannot seek to claim damages or allege
repudiation of the contract simply because an earlier deduction of
LADs gets overtaken by a later extension of time.
Reference: Reinwood Ltd v L Brown & Sons
Ltd [2007] EWCA Civ 601
Contacts: Julian Bailey & Nirada Griffith
Category: construction