| Date | 6 June 2007 |
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| Judgment | Reinwood Ltd v Brown & Sons Ltd, TCC 9 November 2006 |
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| The Issue | Application of the express terms of the JCT contract for the termination of the contract. |
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| Implication |
Strict compliance with the express terms of the contract is necessary for the effective termination of a contract in the event of a specified breach by the other party. A contractor is entitled to act to protect its own legitimate commercial interests in taking such steps. |
printThe termination of a contract is a serious step and one that must only be taken after careful consideration and proper advice. The right to terminate a contract depends on the nature and the consequences of the other party’s breach. The breach must either be of a fundamental term of the contract, often described as one that goes to the root of the contract, or alternatively the consequences of the breach must be such that they substantially deprive the innocent party of the entire benefit intended by the contract. Given that these broad rules leave considerable room for interpretation, most standard forms of contract applied in the construction industry include express terms governing the rights of either party to terminate. A failure to strictly comply with those terms may result in the party seeking to terminate being held to have repudiated the contract. In the recent case of Reinwood v Brown, the court had to examine the circumstances in which the contractor had given a notice of termination following the employer’s failure to pay by the due date. Reinwood had entered into a contract with Brown in the JCT standard form for the construction of 59 residential apartments in Manchester. There had been significant delays in completing the works and although Brown’s claims for extension of time were in the process of being considered, the architect had issued a non completion certificate in accordance with the contract. Five days before the due date for payment of the next interim certificate, having previously notified Brown of its intention to deduct damages for delay, Reinwood paid the sum due less £60,000 liquidated and ascertained damages. On the same day that that payment was made, the architect issued a letter to the contractor granting a further extension of time of approximately four weeks. This had the effect that the delay damages should be reduced from £60,000 to £12,000. In the event, Reinwood did not make that repayment until one week after the due date had passed. By that stage Brown had already taken action. Brown notified Reinwood that the non-payment of the appropriate amount due under its interim certificate was a default under clause 28.2 of the contract. Clause 28 of the JCT form provides the rules for termination of the contract by the contractor in the event that the employer fails to pay. The contractor is obliged first of all to give a notice of default and if that default is not rectified within 14 days, the contractor may then issue a further notice of termination of its employment under the contract. The JCT forms use the term ‘determination’. By clause 28.2.3 if the employer repeats a previously specified default, then the contractor may without further warning give a determination notice under the contract. The contract makes it clear that the second notice, the notice of determination, must not be given unreasonably or vexatiously. Having received payment of the excessive deduction of delay damages within seven days of the due date, Brown was obliged to continue working as the contractual grounds for determination of the contract had been removed. Six months later however, a further dispute arose with regard to the non-payment of a later interim certificate. Brown followed its earlier notice of default this time with a notice of determination and, applying the terms of the contract, walked off site. Unsurprisingly, the parties ended up in court. Reinwood firstly argued that the initial default notice issued by Brown was invalid. The extension of time granted by the architect had not been given in the required format and there had therefore been no obligation upon Reinwood to repay the liquidated and ascertained damages. Even if that was wrong, there was no obligation to pay those monies by the due date; instead there should be an implied term that the repayment should be within a reasonable time. Finally, Reinwood argued that the notice of default had been given unreasonably and vexatiously in breach of the contract requirements. Judge Gilliland dealt with each of these points in turn. Firstly he was satisfied that there was no particular form required for granting an extension of time and that a letter from the architect which was clear in its intention sufficed. That letter had the effect of cancelling the earlier non-completion certificate and any deduction of delay damages by Reinwood after that date was wrongful. It was also clear to Judge Gilliland that the overriding obligation upon Reinwood was to pay the correct amount due by the due date. That meant that the repayment of wrongly deducted delay damages was also required to be made by the due date. Thirdly, although the contractor was required not to issue the notice of determination unreasonably or vexatiously, no such requirement applied to the default notice. The two notices were significantly different and Brown’s notice of default had been validly given. The upshot of all this was that when, six months later, Brown issued the notice of determination following a repeat of the specified default, that notice had been correctly issued within a reasonable time after the non-payment and according to the terms of the contract. In deciding these points Judge Gilliland helpfully commented upon the meaning of the words “unreasonably or vexatiously”. Firstly, it was for the employer to show on the balance of probabilities that the contractor had determined the contract unreasonably or vexatiously. By vexatiously it was meant that the contractor had determined the contract with the ulterior motive of oppressing, harassing or annoying the employer. Whilst the effect on the employer of the determination was therefore a factor to be taken into account, Judge Gilliland was clear that Brown was entitled to act to protect its own legitimate commercial interests and the steps it had taken were neither unreasonable nor vexatious.
CJ-0722
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