Away The LADs?

In a 2008 House of Lords decision relating to withholding

notices, a Contractor claimed to be entitled to determine its JCT

'98 Private with Quantities contract on the ground (amongst

others) that the Employer had repeatedly failed to make payment of

sums due under the contract by the final date for

payment.

Background

The essence of the case was that the Employer's architect

issued a notice of non-completion in accordance with the contract.

Shortly afterwards, the Contractor issued an interim certificate

seeking payment. That was followed by a section 111 notice of

withholding from the Employer, showing a deduction of liquidated

and ascertained damages (LADs). The Employer's architect then

granted an extension of time for completion (EoT). The EoT was

granted before the final date for payment under the interim

certificate but after the notice of withholding had been issued and

payment had been made to the Contractor under deduction of

LADs.

Argument For The Contractor

The Contractor argued that the Employer should have made payment

of the full amount of the interim certificate because the

certificate of non-completion was, in accordance with the contract,

cancelled as a result of the EoT.

Decision

The House of Lords disagreed. They held that both parties should

be entitled to proceed on the basis that payment will, and can

properly, be made in accordance with the notice of non-completion,

provided that the architect has issued the notice and an effective

notice of withholding has been served indicating the Employer's

intention to deduct LADs. In the Court's words,

"[a]ny other conclusion would fly in the face of commercial

common sense." Although the EoT cancelled out the

certificate of non-completion, it did not do so retrospectively and

it only entitled the Contractor to later payment of the sums

deducted as LADs, but which were not payable to the Contractor at

the date of certification.

Conclusion

This is a sensible result. In any other case, the Employer could

be held to have underpaid due to an event which occurred after he

had made payment in an amount which was correct at the time of

payment. The Employer must be entitled to rely on the position

current at the time it makes payment. So long as the Employer acts

appropriately at that time, it should not be penalised because the

position subsequently changes. There is no requirement for an

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