Law Report: Deduction for completion delay on contract unlawful: JF Finnegan Ltd v Community Housing Association Ltd - Official Referees (Judge John Carr), 4 June 1993

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Under clause 24.2.1 of the JCT standard form building contract, 1980 private edition, which deals with liquidated and ascertained damages for delayed completion, the employer must make a requirement in writing of the contractor before making a deduction for liquidated damages.

Judge John Carr decided that although the sum withheld by the defendant for the delay by the plaintiff in completing the building contract between them was not a penalty, the defendant had not followed the correct procedure under the contract for withholding the sum and was not entitled to make a deduction.

The plaintiff entered into a JCT standard form of building contract, 1980 private edition with quantities, with the defendant for the construction of 18 flats for pounds 751,466. The date for completion was agreed as 1 March 1988. Liquidated and ascertained damages for non completion under clause 24 was stated to be at the rate of pounds 2,500 per week.

By clause 24.2.1 the contractor 'shall, as the employer may require in writing . . , pay or allow to the employer the whole or such part as may be specified in writing by the employer of a sum calculated at the rate stated . . . as liquidated and ascertained damages for the period between the completion date and the date of practical completion . . .'

On 9 March 1988 the architect issued a certificate under clause 24 that the plaintiff had failed to complete the works by the completion date. On 4 September the completion date was certified as 13 August 1988. On 6 September an interim certificate was issued for pounds 61,518. On 23 September the architects informed the plaintiff that an extension of time of five weeks would be awarded.

On 28 September the defendant sent a cheque for pounds 14,018 representing payment under the interim certificate. The cheque was accompanied by a note that the amount was the difference between the amount under the interim certificate and the L & A damages and the defendant had withheld pounds 47,500. On 14 November the architects extended the date for completion to 4 April.

The plaintiff contended that (1) the defendant did not adhere to the provisions of clause 24 when making the deduction and (2) the figure of pounds 2,500 in the agreement was unlawful as a penalty.

Keith Hornby (Dibb Lupton Broomhead, Sheffield) for the plaintiff; Ralph Wynne-Griffiths (Lewis Silkin) for the defendant.

JUDGE CARR said that the issue of a certificate under clause 24.1 was a condition precedent to the lawful deduction of liquidated and ascertained damages. The wording of clause 24.2.1 created a condition precedent that before any deduction could be made the employer must make a requirement in writing of the contractor.

If a certificate issued under clause 24.1 was superceded by a grant of an extension of time then the certificate ceased to have any effect, and any notice served pursuant to clause 24.2.1, since it was dependent on that certificate, would also fall.

In the present case the deduction took place prior to the extension of time for completion to 4 April on 14 November. The plaintiff's submission that the deduction was not properly made because the subsequent extension superceded the earlier clause 24.1 certificate failed. It followed that a fresh notice under clause 24.2.1 was not necessary.

However the note sent with the cheque was not sufficient for the purposes of clause 24.2.1. The 'requirement in writing' in clause 24.2.1 should indicate at least the basic details which were being relied on to justify the deduction. Those details then became a matter of record.

It therefore followed that the defendant had not complied with clause 24.2.1 and deduction was made in breach of contract.

Turning to the argument that the figure of pounds 2,500 was a penalty, on the evidence the figure was a genuine attempt by the parties and/or the defendant to estimate in advance the loss which the defendant was likely to suffer should the plaintiff, in breach of contract, fail to complete the contract works.

Ying Hui Tan, Barrister

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