UK: What Constitutes Unreasonable And Vexatious Behaviour When A Notice Of Determination Is Served?

Last Updated: 8 January 2007
Article by Jeremy Glover

Article updated in June 2007

Serving a notice of determination is always a significant step to take. The consequences of getting such a notice wrong can be drastic to the extent that the contractual situation can be completely turned around in favour of the party apparently in default.

In a recent case which came before HHJ Gilliland QC, Reinwood Limited v Brown & Sons Limited, Reinwood issued proceedings seeking a declaration that a notice of default and subsequent notice of determination were invalid. Unusually, it was the contractor and not the employer who had issued the notice. In the course of his decision, the Judge set out a checklist of six propositions which provide valuable guidance as to whether a notice of determination can be considered to be unreasonable or vexatious.

Reinwood entered into a contract with Brown for the construction of 59 apartments in Manchester. The contract was based on the JCT Standard Form of Building Contract, 1998 Edition, Private With Quantities incorporating a Contractor’s Designed Portion. The agreed completion date was 18 October 2004 and LADs were agreed at the rate of £13,000 per week. Under the standard JCT forms of contract 1998, clause 28 contains the determination provisions. In particular a default notice has to be served by a contractor prior to notice being served to determine the contract.

The original completion date was extended to 13 December 2005. On 14 December 2005, the architect issued a certificate of non-completion and then on 11 January 2006, Reinwood issued a notice to withhold under the Contract against interim certificate no.29 for LADs in the sum of £61,629.

However, on 20 January 2006, the architect granted Brown a further extension of time to 10 January 2006. As a consequence, on 24 January 2006, Brown wrote to Reinwood stating that the effect of the further extension of time was that Reinwood were only entitled to deduct one week’s LADs from the payment due under interim certificate 29. Brown asked for payment of £49,303 by the final date for payment. No payment was made.

On 26 January 2006, Brown issued Reinwood with notice of default pursuant to clause 28.2 of the contract on the basis that Reinwood had not paid the amount properly due to Brown in respect of a certificate. In their notice, Brown also stated that if payment in full was not made within 7 days it would suspend works. Payment was made on 1 February 2006.

In June 2006, the architect issued interim certificate 24 which certified the net sum of £39,981 payable to Brown. The final date for payment was 28 June 2006. Payment was not made on this date. On 4 July 2006, Brown served a notice to determine the contract pursuant to clause 28.2.4 of the Contract. Payment was subsequently made on 6 July 2006 through Reinwood’s parent company, Dandara, and it was claimed by Reinwood that the late payment was due to an administrative error. Brown stood by their notice and left the site.

Reinwood issued proceedings seeking a declaration that both the initial notice of default given on 26 January 2006 and the notice of determination given on 4 July 2006 were invalid. Reinwood also claimed that even if it was wrong about the validity of the notices, Brown had acted "unreasonably or vexatiously" within the meaning of clause 28.2.5 of the Contract and that therefore the notice of determination given on 4 July 2006 was void and ineffective. Reinwood further sought a declaration that Brown was in repudiatory breach of the contract in leaving the site and Reinwood also claimed damages.

In response, Brown sought a declaration that it was entitled to and did properly determine the contract.

One of the issues before the Judge was whether a particular form was required for the grant of an extension of time. He said that it was not. Provided the document contains the information specified in the contract whether it is in the form of a letter or in a more formal certificate there will be a valid grant of an extension of time. What is required is that the grant of the extension is in writing. The document must also state what the new completion date is and it must contain the information required by the contract. The word used in clause 23 is not certificate, but the wider term "writing" and there was no justification for restricting or limiting that term to a particular category of document.

The most significant point were taken by Reinwood in relation to the validity of the July 2006 notice of determination was that Brown’s July 2006 notice was given "unreasonably or vexatiously" within the meaning of clause 28.2.5. Having considered the authorities, HHJ Gilliland QC then went on to give the following propositions derived from those authorities.

"1 It is for the employer to show on the balance of probabilities that the contractor has determined the contract unreasonably or vexatiously.

2 By vexatiously is meant that the contractor determined the contract with the ulterior motive or purpose of oppressing, harassing or annoying the employer.

3 The test of what is an unreasonable determination is to be ascertained by reference how a reasonable contractor would have acted in all the circumstances.

4 It is not for the court to substitute its own view of what is reasonable for the view taken by the contractor if that is one which a reasonable contractor might have taken in the circumstances.

5 Although the motive or purpose which a contractor had in exercising the right of determination is a relevant consideration, the test of what is unreasonable conduct in this context is objective and the fact that the individual contractor may have thought that his conduct in determining the contract was reasonable is not conclusive.

6 The effect on the employer of determination by the contractor is a factor to be taken into account and a determination may be unreasonable if it disproportionately disadvantages the employer."

Accordingly, in giving a notice of determination under clause 28.2.4, the contractor in the Judge’s view is fully entitled to have regard to his own commercial interest. On the facts here, there were grounds for the contractor, Brown, to believe that Reinwood was seeking unduly to influence the conduct of the quantity surveyors and of the architect in its favour and against Brown.

The Judge accepted that the effect of determination on the employer may be a relevant consideration. These effects include that, the employer loses any right it has to require the contractor to carry out remedial works. However, on the other hand, the contractor is only entitled to payment for work properly carried out. Further what is in substance a final account is accelerated and this could have cash flow consequences for an employer. Here, there was no evidence to indicate that Reinwood would suffer any financial difficulties as a result of the determination of the contract by Brown or that Brown was aware that it might cause financial difficulties for Reinwood.

It is of course a serious matter for a contractor to determine a contract for a delay in making 2 payments under 2 different interim certificates but as the Judge indicated it was apparent that, subject only to the issue of unreasonableness (or vexation), the contract did confer that right upon the contractor. Further although the amounts involved were not large in the overall context of the contract, they were not, in the view of the Judge, to be considered insignificant. For example, £39,000 would go a long pay to paying wages and a weeks delay is not negligible to those being paid. By not making the payment of the monies due because either of its own incompetence or of an oversight for which it is solely responsible, any difficulties which Reinwood might have suffered as a result of the determination of the contract by Brown had been brought by Reinwood upon itself.

Accordingly here, the Judge did not consider that Brown had acted unreasonably in determining the contract and Brown was accordingly not in breach of contract in leaving the site in consequence.

Conclusion

What therefore constitutes unreasonable and vexatious behaviour when a notice of determination is served? In this case, the Judge took into account various factors including Brown’s own commercial interests, the fact that Brown was not obliged to pursue other remedies (such as adjudication or arbitration) to obtain payment, and that Brown did not have to ascertain why it had not been paid before serving the notice to determine. The Judge also took into account Reinwood’s adversarial approach on the contract, (as well as the approach taken by Reinwood on a different project with another group company) and the state of completion of the project. It should also be noted that even though the failure to pay was due to an administrative error which was not deliberate, that did not render the notice to determine unreasonable. Accordingly whilst every case will always be decided on its own facts, the six point test laid out by Judge Gilliland provides a valuable checklist if consideration is being given to serving a notice of determination.

Postscript

Judge Gilliland's decision was overturned by the Court of Appeal in June 2007 - [2007] EWCA CIV 601. However, in their judgment, the Court of Appeal made no reference to the six propositions described above.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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