UK: Court Of Appeal Reviews LADs Provisions In JCT Contract

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.

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

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 13/07/2007.