Under the JCT forms of contract, the contractor is entitled to terminate its employment under the contract if (amongst other things) the employer repeats a breach of contract, where the contractor has issued a default notice to the employer in relation to the previous breach. The contractor’s right to terminate arises “upon” or “within a reasonable time” of the repetition of the specified breach. This notice of termination must not be issued “unreasonably or vexatiously”.

In the following case, the contract was the JCT Form 1998 Edition, Private With Quantities and the contractor determined its employment under the contract, relying upon the above provision. (The older JCT forms refer to “determination” rather than “termination”, but there is no significance in the different terminology).

One of the key issues was whether the contractor had acted “unreasonably or vexatiously” in determining the contract. Cogent arguments were advanced on both sides:

Reinwood Limited v L Brown & Sons Limited [2007] CILL 2413

The contract was for works in excess of £6 million. The employer was a special purpose vehicle incorporated in the Isle of Man. The works were in delay. The relationship between the parties had become increasingly strained.

The employer committed two breaches of its payment obligations:

  • The first breach occurred in January 2006. The final date for payment for an interim payment was 25 January 2006. The employer made an interim payment to the contractor early, and had deducted from the amount paid, amounts by way of liquidated damages for delay. However, on 20 January 2006, the architect awarded an extension of time. The result was that the employer was, at the final date for payment, no longer entitled to withhold the entire amount of liquidated damages - £61,629 - which it had deducted. It was only entitled to deduct £12,326.

The employer failed to pay the £49,303 which was owing by 25 January 2006. The contractor sent the employer a notice of default under the contract, and the employer paid the outstanding amount within seven days (with interest).

  • The second breach occurred in June 2006 when the employer failed to pay an interim payment of £39,981 by 28 June 2006, which was the final date for payment. The employer made the payment on 6 July 2006.

Prior to 6 July 2006, the contractor issued a notice of determination on the basis that, by failing to pay the sum of £39,981 on 28 June 2006, the employer had repeated a specified default.

Under the JCT forms of contract, if the contractor determines the contract on the basis of the above provision, the employer is subject to an accelerated payment regime for the works properly carried out by the contractor and is deprived of its right to the retention.

The employer argued, amongst other things, that the contractor had acted “unreasonably or vexatiously” in determining the contract, and its notice of determination was therefore invalid.

What does acting ‘unreasonably’ or ‘vexatiously’ mean?

  • The judge reviewed the authorities and set out the following propositions:
  • It was for the employer to establish, on the balance of probabilities, that the contactor had determined the contract unreasonably or vexatiously.
  • ‘Vexatiously’ meant that the contractor had an ulterior purpose or motive in determining the contract; or acted with the purpose of oppressing, harassing or annoying the employer.
  • The test of what was an unreasonable determination was to be ascertained by reference to how a reasonable contractor would have acted in all the circumstances.
  • The court would not substitute its own view of what was reasonable for the view taken by the contractor if the contractor’s view was one which a reasonable contractor might have taken in all the circumstances.
  • The test of what was unreasonable conduct was objective.
  • The effect on the employer of the determination was a factor to be taken into account, and a determination might be unreasonable if it disproportionately disadvantaged the employer.

The employer’s arguments: the contractor had acted “unreasonably or vexatiously”

The employer argued that the contractor had acted “unreasonably or vexatiously” in determining the contract because:

  • The failure to make the payment on 28 June 2006 had been an oversight. It was only six days late; it was modest in amount; the contractor could easily have telephoned the employer to find out why the payment had not been made and, if it had done so, the payment would have been made sooner.
  • There was outstanding defective work required to be carried out before practical completion and the contractor was in culpable delay. In these circumstances, it would be disproportionate that (as a consequence of the termination) the employer would be subject to an accelerated payment regime and would be deprived of its right to the retention, when the contractor could have exercised its right to suspend work until payment was made, and/or sought to enforce its right to payment via adjudication.
  • The contractor had an agenda to extricate itself from the contract. It had, in effect, seized upon an oversight by the employer as an excuse to leave the site and avoid the imposition of further liquidated damages, thereby avoiding incurring further losses on the contract.

Had the contractor acted “unreasonably or vexatiously”?

  • The judge accepted that the employer’s breaches of contract were, in financial terms, comparatively small (in the context of a contract in excess of £6 million); the periods of delay were short; and the employer had not been persistently in delay in paying monies due under the contract. However, the judge also noted the following:
  • A failure by the employer to pay amounts due under the contract was a serious breach. A sum of £39,000 would pay quite a lot of wages and the amount was not so insignificant that it would not affect the contractor’s cash flow.
  • The contractor legitimately had concerns regarding the adversarial approach being adopted by the employer to the contract. The contractor had been involved on another project (with a company in the same group as the employer) in which the contractor had had to bring five adjudications. Although these adjudications had not all been entirely successful, they had resulted in the contractor obtaining monies to which it was entitled. The contractor therefore had valid grounds for believing that this contract would result in a series of adjudications before the contractor would be able to obtain the monies due to it.
  • It was unlikely that the contractor would obtain any further payment if it remained on site because it had been informed that its loss and expense claims (which had provisionally been accepted by the quantity surveyors in earlier interim certificates) were going to be reviewed downwards - at the insistence of the employer. The contractor had grounds for believing that the employer was seeking unduly to influence the conduct of the quantity surveyors - and also the architects - in its favour, and against the contractor.
  • There was a bona fide dispute between the parties as to whether practical completion had been achieved - there was no evidence that the contractor’s view (that practical completion had been achieved) could not be held by a reasonable contractor.
  • There was no evidence that the employer would suffer any financial difficulties as a result of the determination of the contract. This was not a case where the employer was left with a half completed building; and it had not been argued that it would be difficult for the employer to finish off the remaining works quickly.
  • The contractor had a legitimate concern to protect its legitimate interests. It had acted in its best interests and not with any motive of harassing, oppressing or annoying the employer.
  • The employer’s behaviour in relation to payment in January 2006 had not been conducive to good relations. In these circumstances, the employer could not be surprised if the contractor was suspicious of its actions. The judge concluded that, in all the circumstances, it was not unreasonable for the contractor to exercise a right of determination, and thereby resolve all matters in a single adjudication.

Editors’ comments

The judge was clearly unimpressed with the employer’s behaviour in this case - in particular, with the undue influence it had sought to exert on the architect and quantity surveyor. As the details of the employer’s behaviour emerged from the judgment, it became increasingly clear that the employer’s argument was unlikely to prevail.

Would the position have been different if a ‘model’ employer had on two occasions (admittedly due to its own administrative error/incompetence) failed to make two payments, in circumstances in which the contractor was in culpable delay; was liable for liquidated damages; and was making losses on the contract?