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• Withholding Monies

Introduction

A recent Court ruling has thrown further light on the issue of when an employer under a Building Contract can withhold payment of monies otherwise due to a contractor. Section 111 of the Construction Act provides that a party to a construction contract may not withhold payment after a final date for payment unless it has given an effective withholding notice.

Judgment was recently handed down in the case of Reinwood Limited v L Brown & Sons Limited. In this case the employer had provided a withholding notice under a JCT contract deducting £61,000.00 of Liquidated Damages from an amount certified by the architect. The employer then paid the balance of £126,000.00 before the final date for payment. Just after payment but before the final date for payment, the architect extended the date for completion with the result that only a total of £12,000.00 liquidated damages was due to the employer rather than the £61,000.00 deducted.

The following day the contractor asked the employer to pay the £49,000.00 difference between the liquidated and ascertained damages which had been withheld and the lower sum now due to the employer for liquidated and ascertained damages. The employer paid the £49,000.00 a few days later after the contractor had issued a default notice. However, the contractor still purported to terminate the contract on a number of grounds, one of which included that the employer had wrongfully withheld the £49,000.00 liquidated damages for the period prior to its payment.

The House of Lords found that the employer was entitled to act as it did, and was not in default. A supervening event may have undermined the factual basis for claiming liquidated damages but it did not remove the legal basis for the employer's claim. The contract envisaged any adjustment to the parties' financial rights being picked up in later certificates.

The decision emphasises that one of the purposes of the payment provisions of the Construction Act is to enable the parties to know where they stand financially. If the contract provides an adequate mechanism for certification, withholding and payment (and the mechanism complies with the Act) the parties can be confident in following the payment requirements, but contract administrators need to consider carefully whether to grant extensions of time just prior to a final date for payment.

Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.