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Liquidated damages: no need for a withholding notice?

In the recent case of Balfour Beatty v Modus Corovest an employer argued that a contractor needed to issue a withholding notice if it did not intend to pay liquidated and ascertained damages (LADs) claimed by the employer. As far as we are aware this is the first time that such an argument has been raised.

The TCC rejected the employer’s argument on the basis that the whole purpose of Part II of the Construction Act 1996 (Act) and the Scheme for Construction Contracts 1998 (Scheme) is to improve cash flow for contractors and sub-contractors and there is nothing specific in either the Act or the Scheme about payments to the employer.

In its legal update, PLC Construction suggested that a careful contractor might still choose to send an employer a withholding notice if it declines to pay LADs in order to avoid unnecessary argument. This seems to us to be overly conservative and creates an additional administrative burden in circumstances where it would appear to be unnecessary to do so.

In our view, the processes and requirements of the Act and the Scheme do not, and are not intended to, work in these circumstances. For example, section 109 of the Act clearly relates to payments to be made to the party carrying out the works. Section 110 specifies when such payments should be made and section 111 sets out the withholding notice regime. All these provisions are aimed at ensuring that the party carrying out the works receives proper stage payments.  Similarly, Part II of the Scheme clearly applies only to payment for work carried out under the contract (paragraphs 1-4). Paragraphs 5, 6 and 7 provide for when such various stage payments and final payments should be made.

As noted by the judge in the Balfour Beatty case, paragraphs 6 and 7 of the Scheme set out the regime for payment of the contract price and “any other payment under a construction contract” respectively. In each case, payment must be made within a specified time following completion of the work or “the making of a claim by the payee” (defined at paragraph 12 of the Scheme as “a written notice given by the party carrying out work under a construction contract” [emphasis added].

It is difficult to see how the provisions of the Act and the Scheme can apply to any claim by the employer, who is not carrying out any work at all. As a result, we would be very surprised if a TCC judge concluded that a contractor should issue a withholding notice if it did not intend to pay LADs levied by an employer and we would not advise a contractor that it needed to do so in these circumstances.

One thought on “Liquidated damages: no need for a withholding notice?

  1. With apologies to Jancyn and her readership for going off-topic, one point I found interesting about this case was a small comment made by the judge in the opening paragraphs of his judgment. He said that because the JCT contract had been amended by a Sectional Completion Supplement and the client’s Schedule of Amendments, the drafting of some clauses of the building contract was to be found in three different places.

    The position has obviously improved since the introduction of the JCT 2005 contracts, which have integrated provisions for Sectional Completion, but isn’t it time the industry started integrating client amendments into JCT contracts too? This is possible (albeit painful) with the JCT’s digital service, which enables you to type in changes. Client amendments to standard forms are a necessary fact of life for a number of good reasons, but in the twenty first century I can’t see that inch thick Schedules of Amendments are the answer.

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