Liquidated damages: notices matter

Much has been written about the Court of Appeal decision in Grove v S & T in the context of adjudication practice, but the case also provided guidance over the timing of the requisite notices under JCT contracts where liquidated damages are to be deducted.

Three notices

Under the JCT forms of contract, three notices are typically required prior to the deduction of liquidated damages. These are:

• A Notice of Non-Completion (clause 2.28, JCT 2016 Design and Build): If the Contractor fails to complete the Works or a Section by the relevant Completion Date, the Employer is required to issue a notice to that effect. If an extension of time is awarded subsequently, a fresh Notice of Non-Completion must be issued by the Employer.
• A Notice that the Employer may require the deduction of LADs (clause 2.29.1.2, JCT 2016 Design and Build) – a warning notice: The Employer is required to notify the Contractor, before the due date for the final payment under the contract, that he may require payment of, or may withhold or deduct, LADs. A further warning notice is not required under clause 2.29.1.2 notifying of the intention to deduct LADs where a new Non-Completion Certificate is issued (clause 2.29.4).
• A Notice demanding payment of LADs or withholding or deducting them (clause 2.29.1 JCT 2016 Design and Build) – a deduction notice: The Employer is required, no later than 5 days before the final date for payment of the amount payable under the contract, to give a notice requiring that for the period between the Completion Date and the date of practical completion:
• the Contractor is to pay LADs at the rate in the Contract Particulars or any lesser rate stated in the notice (clause 2.29.2.1)
• the Employer will withhold or deduct LADs from the Contractor at the rate in the Contract Particulars, or any lesser rate stated in the notice (as set out in clause 2.29.2.2).

Timing of the notice

The timing and sequencing of the notices is important and notices should be served in the correct order. For example, the issue of a Notice of Non-Completion is a prerequisite to the Employer's ability to deduct LADs so the failure to issue such a notice, or as the case of Octoesse v Trak [2016] EWHC 3180 (TCC) illustrates, to issue a fresh Notice of Non-Completion where an extension of time fixes a new Completion Date, can prevent the Employer being able to deduct LADs.

However, the JCT typically does not specify an interval or time period between the warning notice and the deduction notice, in contrast to the notices required to be served under the termination provisions.

The length of time required before service of the deduction notice was one of the issues raised in Grove.

In that case, the contractor argued that the deduction notice under the contract (an amended JCT Design and Build 2011) was invalid because the contractor was not given sufficient time to read, understand and digest the warning notice before the deduction notice was sent. The relevant meta-data showed that the warning notice was sent at 17.01 followed within a matter of seconds by the deduction notice.

Whilst expressing a degree of sympathy for the contractor's position, both the high court and the Court of Appeal in Grove found that as the notices were served and received in the correct order they could not be said to be defective. Provided that a "scintilla" of time elapsed after giving of the warning notice and before giving the deduction notice that was sufficient.

Comment

The Grove case provides some guidance as to the interpretation of the notice requirements of liquidated damages provisions. Notices do matter and parties and contract administrators would be well advised to ensure that notice requirements under the contract are adhered to particularly with regard to time-scales and sequencing.