This case is only the second in which the House of Lords has had to consider aspects of the Housing Grants Construction and Regeneration Act 1996. 

The first case was last year’s decision in Melville Dundas Ltd v George Wimpey UK Ltd in which the House of Lords looked at the interaction between contractual payment mechanisms following determination of the contractor’s employment and the statutory requirements of Section 111 of the Act regarding notices of withholding.  This case concerns the interaction between contractual provisions in regard to non-completion certificates and notices of withholding issued in compliance with Section 111 of the Act.

As with the Melville Dundas case, the issues thrown up by this case arise from the uniqueness of the chronology of events on the contract.

Reinwood had entered into a contract with Brown in the JCT Standard Form for the construction of 59 residential apartments in Manchester.  The contract was in serious delay when the architect issued a non-completion certificate on 14 December 2005.  On 11 January 2006, the architect issued interim payment certificate No 29 in the sum of some £187,000 with a final date for payment of 25 January 2005.

In reliance of the architect’s non-completion certificate, Reinwood notified Brown on 17 January 2006 of its intention to withhold delay damages of some £61,000 from monies otherwise payable under interim payment certificate No 29.

On 20 January 2006, Reinwood paid Brown the sum due under interim certificate No 29 after deduction of delay damages of some £61,000.  On 23 January 2006, the architect issued an extension of time award which would have effectively reduced delay damages to a little over £12,000.  Crucially, this award preceded the final date for payment of interim certificate No 29 by two days.

On 26 January 2006, Brown served a notice of default under Clause 28.2.1.1 of the determination provisions within the parties’ contract.  On 1 February 2006, a week after being advised of the architect’s extension of time, Reinwood refunded Brown the excess delay damages withheld.

Having received repayment of the excess delay damages, Brown was obliged to soldier on with the project.  However, six months later, Brown determined its employment under the contract on account of an alleged repeated default of the original notice given by them on 26 January 2006.

At first instance, Judge Gilliland decided in the Technology and Construction Court that Brown’s original notice of default had been validly given and that its notice of determination was not given unreasonably or vexatiously.

Unsurprisingly, Reinwood appealed the judgement of Judge Gilliland.  The Court of Appeal decided on the narrower point that a valid withholding notice issued in accordance with Clause 30.1.1.4 did not cease to be effective when a certificate of non-completion is cancelled (i.e. by the issue of a fresh award of extension of time).  According to Dyson LJ, Reinwood was not in default because they did not pay the balance of the amount due to the contractor before the final date for payment under Clause 30.1.1.4. 

Brown was not satisfied with the outcome of the appeal and sought to have the issue decided by the highest court in the land.  Although the sum in dispute was relatively small, the House of Lords was prepared to hear an appeal on this case, presumably reflecting the need for certainty regarding interpretation of the provisions of the Act.

Brown’s position in the appeal to the House of Lords was that Reinwood’s entitlement to withhold delay damages of some £61,000 did not exist by the final date for payment as it could no longer rely upon the validity of the non-completion certificate issued by the architect in December 2005.

Reinwood argued however that they had complied with all of the provisions of the parties’ contract in regard to the issuing of notices and in addition had refunded Brown the excessive deduction of delay damages within a reasonable time of being advised of the award of an extension of time.

In a unanimous decision, the House of Lords dismissed the appeal by Brown and confirmed the judgement of the Court of Appeal.  In giving the leading opinion, Lord Neuberger found that where the employer had issued a valid and effective notice in accordance with Clause 30.1.1.4 of the parties’ contract, then “both parties should be entitled to proceed on the basis that payment will, and can properly, be made in accordance with that notice.  Any other conclusion would fly in the face of commercial common sense”.  He reasoned that the effect of the extension of time was to cancel the subsisting non-completion certificate upon which Reinwood’s right to deduct damages depended.  Nevertheless such a “cancellation” did not in his view apply retrospectively.  According to the judge, such an interpretation would not apply to the normal meaning or effect of the word “cancel”.

Furthermore, Lord Neuberger considered that as a matter of policy, the intention of the Act was to enable parties to know in advance where they stood in relation to interim payments.  That policy would be seriously undermined if the court agreed with the contractor’s argument that neither party could rely upon a valid withholding notice as determining their respective rights and obligations with regard to payment of an interim certificate.

The judgement in this case, as well as in the Melville Dundas case, will be of limited application given that both are products of an unusual chronology of events.  However, having restricted the application of the Act in the Melville Dundas case, the courts now seem unwilling to further undermine the Act’s primary purpose in relation to interim payments.

- Alex Warrender