Reinwood Limited v L Brown & Sons Limited, [2008] EWCA Civ 1090

The Court of Appeal has held that the contractor’s notice of determination in July 2006, which relied on defaults in January 2006 and June 2006, was still valid, irrespective of the fact that the employer was not, in fact, in default in January 2006, so that the default notice issued in January 2006 was invalid. A valid default notice had been issued in May 2005 and the contractor had not waived its right to rely on that notice, either by giving notice specifying a default in January 2006 (rather than giving notice to determine the contract on the basis that the default in January was a repeat of the earlier specified default) nor by referring in the July 2006 notice to the January default and not to the May 2005 default. To read the judgment click here.  

Reinwood: To briefly recap the facts, Interim Certificates were for sums exclusive of VAT and, under the contract, it was up to the contractor to make and serve on the employer separate provisional assessments of VAT. The first provisional assessment was raised in April 2005. The employer did not pay the VAT and, on 12 May 2005, the contractor gave notice of a ‘specified default’ for this non-payment. The parties subsequently agreed that a lesser amount of VAT was due and that amount was paid, but the court noted that the notice of default had, at that time, been served and if valid (which the court held that it was) it was not deprived of its effect by the subsequent agreement and payment of a lesser sum for VAT.

On 26 January 2006, the contractor gave another notice specifying a default, following the employer’s decision to withhold £61,629 on account of LADs when paying the sum due on Interim Certificate No.29. On 28 June 2006, the employer failed to pay £39,981 due under Interim Certificate No.34 and, on 4 July 2006, the contractor served notice of determination, relying on the notice of default dated 26 January 2006 and not referring to the previous notice of default dated 12 May 2005.

The result of the appeals from the first judgment was that the employer was entitled to make the deduction it did from Interim Certificate No. 29, so it was not in default in January 2006 and the notice of default dated 26 January 2006 was invalid. The issue was therefore whether the earlier notice of default (May 2005) was valid and, if so, whether the contractor was entitled to rely on it as justifying the notice of determination dated 4 July 2006.

The court noted that Clause 1.1 of the VAT Agreement incorporated by Clause 15 of the JCT Standard Form of Contract, 1998 Edition, With Quantities requires the contractor to make and give to the employer ‘a written provisional assessment of the respective values … of those supplies of goods and services for which the Certificate is being issued and which will be chargeable’ at zero and at any positive rate of VAT, specifying the positive rate and giving the grounds on which the positive rate is chargeable. In order to comply, the contractor only needs to explain why a positive rate of tax is applicable, so that he need do nothing more than state (expressly or impliedly) that a part of the relevant supply is standard-rated because it relates to the construction of commercial rather than residential accommodation.

The contractor does not need to go further and state why he considers that the amount in question is the amount so chargeable.

Clause 1.2.1’s reference to the employer’s ability to object to the assessment is a reference to the employer’s ability to object to the figure provided in that assessment. In order to qualify as a notice of objection under clause 1.2.2, the employer MUST use the word ‘object’ or ‘objection’ or some other language that makes it clear that it refuses to accept the assessment as correct. It MUST indicate why it so objects or refuses. It would not be a valid objection that the contractor had not given enough of an explanation of how it made its assessment, but it would be enough to say that the assessment was too high.

The court recognised that its interpretation meant that ‘the contractor might never put forward more than a bare unexplained figure by way of a provisional assessment, that the employer might, on advice, object each time that the figure was too high, and that, unless the parties co-operated outside the framework of the contractual provisions, the true position might not be sorted out until the final stage by reference to the Commissioners.’ The court concluded, however, that it was ‘relatively unlikely’ that this would occur without any attempt by the parties to work out the correct position in the meantime, but even if the parties dug their heels in and relied on the strict position under the contract ‘it would not be an unworkable or absurd result’.

In relation to waiver, the court held that the fact that the notice of determination in July 2006 referred expressly to the January notice of default, and not to the May 2005 notice, did not constitute waiver of its right to rely on the May 2005 default notice It is a general principle of contract law that ‘if a party refuses to perform a contract, giving a reason which is wrong or inadequate, or giving no reason at all, or terminates a contract under a contractual provision to that effect, the refusal or termination may nevertheless be justified if there were at the time facts in existence which would have provided a good reason for the refusal…That principle is often used in relation to facts unknown to the party refusing at the time of its refusal, but there is no reason why it should not be used in relation to facts which were known to that party at that time. Waiver can apply to qualify that principle, but only in cases of, in effect, estoppel.’