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Take notice of liquidated damages

Clauses providing for liquidated damages can benefit both contractor and client, but written notices are crucial

The JCT standard forms of contract prescribe many types of notices and certificates, the inter-relation of which can lead to disputes, particularly in relation to liquidated damages.

Liquidated damages clauses avert the legal hurdles of proving actual loss as a result of a breach of contract. They benefit the contractor since he knows his level of liability for a particular risk and they benefit the employer through reduced bids.

The clauses of the JCT forms provide a code for the payment of liquidated damages. The period for which liquidated damages can be claimed will be known to the employer once the completion date and the date of practical completion has been determined.

If the contractor fails to complete by the completion date then three conditions have to be satisfied before the employer has the right to deduct liquidated damages. They are:

  1. The architect must issue a non-completion certificate.

  2. The employer must give a general notice that he might deduct liquidated damages.

  3. The employer must issue a withholding notice against each interim certificate for payment stating the amount of liquidated damages he intends to deduct from the sum due.

In A Bell and Son (Paddington) v CBF Residential Care and Housing Association [1989] the court held that the employer lost the right to deduct liquidated damages because the requirement that an architect’s non-completion certificate be issued had not been fulfilled.

The architect had granted an extension of time that cancelled the previous non-completion certificate under the JCT 80 form and he had not issued a replacement certificate.

Written notice

In J F Finnegan v Community Housing [1993] the Court of Appeal held that a written notice from the employer under JCT80 is a condition precedent to the right to deduct liquidated damages.

The JCT forms have been revised to take into account these decisions. The revised forms are JCT 1998 and JCT 2005. The terms of the 1998 form have been considered by the Court of Appeal in Reinwood v L Brown & Sons.

The key date was January 25, 2006, the final date for payment of the architect’s Interim Certificate No 29. The amount was £188,000. The architect had issued a non-completion certificate on December 14, 2005. The only obstacle to the employer deducting liquidated damages was the issuing of two notices to satisfy the remaining conditions.

The first notice was the general notice that the employer might deduct liquidated damages. This was issued on January 17, 2006, and stated that he intended to deduct liquidated damages for the period from December 14, 2005, to the date of practical completion.

Deducting damages

The withholding notice relating to IC No 29 had to be issued not later than five days before the final date for payment on January 20. The employer issued that notice on January 17. He stated that he intended to deduct £62,000 in liquidated damages.

Having issued both the notices and removed the remaining obstacles for deduction of liquidated damages, the employer paid £126,000 on January 20, which was before the final date for payment.
That would have been the end of the matter, had the architect not granted an extension of time on January 23.

The effect was to cancel the previous certificate of non-completion, the first condition for deduction of liquidated damages. The employer did not reissue the two notices to satisfy the last two conditions. He could no longer give a notice of withholding since the cut-off date for the notice had passed.

The extension of time meant that the amount of liquidated damages was only £12,300.

Grounds for termination

Whether the employer was entitled to deduct £62,000 of liquidated damages became an issue because one of the grounds on which the contractor had terminated the contract was that the employer had failed to make payment in full.

On January 17 the three conditions for deduction from IC No 29 of the liquidated damages of £62,000 were satisfied. The issue was whether a valid withholding notice ceased to be effective when a certificate of non-completion was cancelled by the subsequent grant of extension of time.

The contractor argued that the time at which the conditions had to be satisfied was at the final date for payment. He relied on the decision in A Bell and Son v CBF that, if a certificate of non-completion is superseded, then the employer’s general notice also falls.

As to the withholding notice, it was argued that it had ceased to be effective. Liquidated damages were not due to the employer because the certificate of non-completion on which they are based had been cancelled. Although the withholding notice was effective before the cancellation of the certificate of non-completion, it ceased to be effective after.

But the Court of Appeal held that where the three conditions were satisfied, the right to deduct the amount of liquidated damages specified in a notice of withholding crystallised on the giving of the notice.

The decision in Bell and Son v CBF Residential Care was distinguished as it was decided on a different edition of the JCT.

Under the JCT 1998 Edition the employer’s entitlement to deduct liquidated damages was to be calculated by reference to the completion date fixed at the date of the notice. The court held that the continuing effect of the withholding notice did not depend on the continuing existence of the certificate of non-completion.