The recent case of Reinwood Ltd v. L Brown & Sons Limited (2006), in which the writer represented the successful defendant, has provided much-needed guidance on determination by a contractor of its employment under the JCT Standard Form of Building Contract 1998 Edition, the specific point being whether this step has been taken “unreasonably or vexatiously”. This judgment is helpful as it is likely to apply to the JCT 2005 suite of contracts, which are in substantially the same terms as the 1998 suite.
Reinwood employed Brown to construct 59 residential apartments in Manchester under the terms of the 1998 JCT Contract.
Reinwood is a single purpose vehicle (spv) established to develop the project and is part of the Dandara Group of companies. This was the second project between Brown and a Dandara spv and neither ran particularly smoothly. The project at the heart of this case was significantly delayed and Brown was aggrieved by the manner in which payments were made, ie not being paid the proper amount due or on time. This culminated in Brown giving two notices of a specified default, followed by a notice to determine its employment under the contract.
The sequence of events leading to Brown’s notice of determination was that:
- On 11 January 2006, interim certificate 29 was issued under which Brown was to be paid £187,988. The final date for payment was 25 January 2006 ie 14 days from the date of issue of the certificate.
- Previously, on 14 December 2005, the architect had issued a certificate of non-completion certifying that Brown had failed to complete the works by the already extended completion date of 13th December 2005.
- On 17th January 2006 Reinwood notified Brown of its intention to withhold £61,629 by way of liquidated and ascertained damages.
- On 20 January 2006 (five days before the final date for payment) Reinwood paid the balance and withheld the £61,629.
- However, also on 20 January, the architect wrote to Brown, granting a further extension of time to 10 January 2006.
- Brown claimed that it was entitled to payment of the balance of the certified sum before the final date for payment on 25 January 2006. When Reinwood failed to pay the balance, Brown served a notice of specified default (the January 06 notice). The balance was thereafter paid, on 1 February 2006.
- In July 2006 (the July 06 notice), Brown issued a notice to determine its employment under the contract for the repeat of the specified default, ie Reinwood had failed to pay on 28 June the sum of £39,981 due under interim certificate 34 by that date, being the final date for payment of that sum.
In the subsequent dispute, the issues were:
- The validity of the January 06 notice:Reinwood argued that the architect’s letter of 20 January was flawed - a formal notification of revision to the completion date was required to complete the necessary contractual formalities. Without that notification, no liability arose to repay the damages. Therefore, Brown had not been entitled to give a notice of specified default as Reinwood had paid all that was “properly due” under the certificate of 11 January.
- The validity of the July 06 notice:Reinwood argued that Brown had given the notice of the specified default “unreasonably or vexatiously”.
The January 06 notice: the meaning of “properly due”
The judge found that no notification in the form argued for by Reinwood was necessary. An architect can grant an extension of time under the contract by issuing a letter. All that is required is that the decision is in writing. The contract does not call for any additional notification or certification document. Therefore the amount properly due at the final date for payment was the full amount certified by the architect on 11 January and Brown was entitled to issue a notice of specified default.
The July 06 notice: the meaning of “unreasonably or vexatiously”
Reinwood’s case that a notice of specified default could not be issued unreasonably or vexatiously was rejected as this proviso only applies to the notice of determination.
HHJ Gilliland QC looked in some detail at the meaning of “unreasonably or vexatiously” in the context of a notice of determination. Although this issue has arisen quite regularly, there is no definitive guidance in the case law. Looking at the authorities, the judge distilled his conclusions into the following six propositions:
- It is for the employer to show on the balance of probabilities that the contractor has determined the contract unreasonably or vexatiously.
- “Vexatiously” means that the contractor determined the contract with the ulterior motive or purpose of oppressing, harassing or annoying the employer.
- The test of what is an unreasonable determination is ascertained by how a reasonable contactor would have acted in all the circumstances.
- It isn’t for the court to substitute its own view of what is reasonable for the contractor’s view if that is one which a reasonable contractor might have taken in the circumstances.
- Although the contractor’s motive in exercising the right of determination is relevant, the test of what is unreasonable conduct is objective and the fact that the individual contractor may have thought that his conduct was reasonable is not conclusive.
- The effect of the determination on the employer is a relevant factor and it might be unreasonable if it disproportionately disadvantages the employer.
Reinwood’s allegations of unreasonable behaviour were that its failure to pay what was a modest amount was an oversight, that Brown’s response was disproportionate and that Brown’s managing director had had an agenda to extricate the company from the contract.
In dismissing these allegations, it is significant that the judge stated that a contractor is entitled to have regard to its own commercial interests when giving a notice of determination. The previous dealings with Reinwood’s associated Dandara company, involving similar payment difficulties, could be taken into account by Brown when deciding whether to determine its employment under the contract. The corporate veil separating these two related companies did not operate to neutralise Brown’s concerns.
Conclusion: The main points to note from this case
This case is currently heading towards the Court of Appeal. In the meantime it does provide useful guidance on three matters:
- The meaning of “properly due” for the purpose of giving a notice of specified default under the JCT contract;
- The formalities required for an extension of time of the JCT suite of contracts;
- The meaning of unreasonable and vexatious conduct in the context of giving a notice of determination under the JCT suite of contacts.
It is clear from the facts of this case that the bar for establishing unreasonable conduct is set quite high. The case clearly supports the proposition that a contractor can act commercially when taking this step provided that it is not unreasonable to do so. In terms of granting extensions of time, architects should take care with correspondence, as it appears that no particular formality is required for notifications of extensions of time.